Power producers feel the heat as global coal prices surge

Adani Power, Essar Power and Tata Power among firms that rely on imported coal

Global coal prices have been on a steady rise over the past year, increasing cost pressure on thermal power producers already reeling under the pressure of lower power demand.

The price of 4,200 kcal/kg grade coal, a very popular grade bought by both India and China, surged 33 per cent to $49.25 (~3,130) a tonne on Friday from $37 (~2,351) a tonne at the start of 2017, Platts data shows.

Thermal power producers, which are dependent on imported coal, are facing a tough situation where the cost of power production is high but the sale price continues to remain weak. Adani Power, Essar Power, Tata Power, and JSW Energy are some of the companies that run power generation capacities on imported coal.

“Our sourcing cost for coal has increased from $55 a tonne to $60 a tonne in the past three to four months,” said Sandeep Sinha, head-materials, Essar Power, whose half of the 2,400 MW capacity runs on imported coal.

Analysts expect higher coal costs to show their impact in the third-quarter results. For example, Adani Power's consolidated net loss increased to ~12.9 billion in the December quarter, as against ~6.6 billion in the corresponding quarter last year, on account of higher fuel cost, lower generation, and high interest and depreciation cost.

“Prices are of late rising and there is a definite impact on the third-quarter numbers also. We do not expect prices to cool down, as all energy prices are shooting up,” said an independent analyst, who did not wish to be identified.

The analyst added that for companies with power purchase agreements (PPAs) in place, Coal India’s recent hike in prices might come as a respite. “PPAs are linked to the Central Electricity Regulatory Commission (CERC) index, which in turn reflects Coal India’s prices. There would be a pass through, but it will come with a time lag,” he said.

For companies like Adani Power and Tata Power, the Mundra power units, which run on imported coal, might end up being a further drag on their financials. Both companies signed up for a lower tariff agreement for power sold from the Mundra units.

“Looking ahead, we believe that recent sharp uptick in international coal prices will negatively impact APL’s profitability, as it is dependent on imported coal for most of Adani Power’s plants,” Rupesh Sankhe wrote in a Reliance Securities report.

Power producers are also grappling with coal shortage from Coal India, which could force companies to increase reliance on imported coal.

“Given that Coal India continues to miss its monthly production targets, Indian power plants will likely depend on imported cargoes to fulfil their demand as well. However, we do not foresee a significant surge in demand for seaborne cargoes, given the current high coal prices. We expect utilities to look more towards domestic market to fulfil their requirement for now, but may later turn their attention to seaborne cargoes in case imported prices fall,” said Deepak Kannan, managing editor, Asia Thermal Coal, S&P Global Platts.

While coal prices are expected to remain firm in the coming months, a lot will depend on China and how India works out its inefficiency in coal transportation.