Tata Power a Casualty of Rising Coal Costs in India

by on

The shortage of coal in India for generating power has claimed its first victim, so to speak.

Leading Indian private electricity producer and supplier Tata Power has decided to sell a 30 percent stake in coal mining firm PT Arutmin in Indonesia to the Bakrie Group from Indonesia for US $500 million.

Tata Power wants to raise cash to make up for operational losses of its project at Mundra in the state of Gujarat in western India, and to reduce the company’s consolidated debt, though it is not likely to affect the overall supply of coal to the company.

A report in The Times of India stated Tata Power was exiting one of the two coal mines it held in Indonesia to cover up for losses in another project. But it would continue to hold the stake in PT Kaltim Prima Coal (KPC), which owns one of the largest thermal-coal-producing mines in the world. KPC would also continue to supply coal to the group’s power plants, Tata Power said in a statement.

The company, according to the report, had acquired the stakes in 2007 for US $1.1 billion to feed the Mundra power project. The latter is the first of the four 4,000-MW plants the government had conceived as public-private partnership projects to increase India’s generation capacity.

The news seemed to have been greeted positively by the stock markets, at least. The day after the announcement, on Monday, shares of Tata Power jumped 3.5 percent in intraday trade.

Tata Power signed the agreement through its wholly owned units, the company said in a statement. The sale is subject to restructuring moves, which Tata Power plans to complete in the next three months, it said.

What’s Wrong with This (Policy) Picture

Analysts here say Tata’s Mundra plant woes symbolize all that’s wrong with the India government’s policy on power. Other private power producers in the country like Anil Dhirubhai Ambani’s Reliance Power also face a similar predicament, no thanks to populist political steps that thwart power tariff revisions to keep up with rising costs of the raw material – in this case, coal.

More than three years after beginning production at Mundra, Tata Power had reported a loss of about US $287 million in 2011-12 as it was unable to raise tariffs.

The electricity regulatory authority had earlier ordered states to form a panel to decide on compensating the firms for higher costs. The latter had put forth a certain hike per unit, but the state government had rejected this proposal, fearing a political backlash.

Rising Coal Costs

The cost of imported coal has gone up due to changes in law affected by exporting countries like Indonesia. MetalMiner recently reported how a ban on exports of key mineral ores by Indonesia – unless they are processed in the country – could backfire, as weaker commodity prices meant it was not cost-effective to invest in expensive smelters and refineries.

Private power producers had tried all other tricks in the book, including blending India coal with the imported variety, but quality differences led to failure.

Tata Power Managing Director Anil Sardana said in a statement that the current coal price scenario presented a challenge to the entire coal-mining sector. Tata Power, he said, did not expect any impact on the coal supplies to its plants because of this move.

FREE Download: The Monthly MMI® Report – price trends for 10 metal markets.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.