When the Supreme Court of India ruled earlier last week that almost all the coal blocks allotted for mining were illegal and had to be returned, the immediate reaction from Indian industry was that it will create fallout in India’s power sector.
MetalMiner reported how the ruling pushed the reset button on Indian industry.
Going by the average estimate put out by various ratings and research agencies, India’s coal import bill was expected to go up US $22 billion in 2015-16.
What’s more, the bottom lines of metal companies, too, were set to be negatively impacted after 2014-15 as, in the coming days, they would have no choice but to import coal to meet their needs. In 2015-16, players in the sponge iron and aluminum sectors were expected to see a fall in operating profits of between 900-1,000 bps and 300-400 bps decline, respectively, credit ratings agency Crisil said. A report by Fitch Ratings, too, held similar opinions.
The Economic Times said in an analytical report that according to Crisil, Coal India Ltd., India’s sole public-sector company authorized to mine coal would be in no state to meet the demands of the metal companies.
Another agency India Ratings, too, warned of higher import dependence by Indian companies, since there would be a demand-supply mismatch.
In FY14, India has imported 171 million tons (mt) of coal at $16.41 billion (FY13: 145 mt at $17.01 billion). A halt in domestic production of coal would increase this dependence.
Analysts said the CIL itself was struggling to achieve its own coal production targets in fiscal year 2014. To achieve the captive coal mines’ coal production target, CIL will have to improve its production performance by 8.41%, which does not look feasible.
The Crisil report said the impact of the de-allocation of mines will affect companies like JSPL, Monnet Ispat and Prakash Industries Ltd. The players will have to depend on imported coal which is about 4 times more expensive.
In the opinion of analysts from Fitch Ratings, the September 24 Supreme Court ruling to cancel almost every coal block allocation since 1993 will have a negative financial impact on several power and steel companies. The decision was broadly “credit negative” for these sectors, but “should have no impact on the ratings of any Fitch-rated steel or power sector corporates.”
According to the ruling, the mines will be allowed to continue operations until March 2015, at which point they will be handed back to CIL until sold under a new auction process.
What is even more damning for mining companies with cancelled licenses is that they will not receive any compensation on account of development expenditure incurred to date, meaning these will have to be written off, according to Fitch.
The negative financial impact will differ depending on the company. Fitch said the ruling will have no immediate direct impact on Tata Steel Limited (BB+/Stable) and Steel Authority of India Limited (SAIL, BBB-/Stable). All but one of their operational coal mines were allocated before 1993, and so was exempt from the court ruling.
The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.