As coal prices rise, power cos feel the heat with higher cost pressure

Global coal prices have been on a steady rise in the last few months, increasing cost pressure for thermal power producers in the country. This is happening as they struggle with lower offtake for the power they generate.

The price of 4,200 kcal/kg grade coal, which is a very popular grade bought by both India and China, has surged 33% to $49.25 per tonne as of Friday, compared with the start of 2017 when it was assessed at $37 per tonne, Platts data shows.

Thermal power producers in India who are dependent on imported coal now face the tough situation of higher cost of production, while the sale price for power continues to remain weak in India. Adani Power, Essar Power, Tata Power and JSW Energy are some of the companies which run power generation capacities on imported coal.

“Our sourcing cost for coal has increased from $55 per tonne to $ 60 per tonne in the last three to four months time," said an official from Essar Power. To put the rise in perspective, the official stated, ballpark for every one dollar rise in coal prices, there is 20 to 25 paise addition to the cost of power generated. For Essar Power, 50% of its 2400 megawatt capacity runs on imported coal.

Power producers are already feeling the heat, with analysts expecting higher coal costs to show its impact in the third quarter results reporting. For those like Adani Power, the effect is evident. The company’s consolidated net loss increased to Rs 12.9 billion against Rs 6.6 bn in the corresponding quarter a year back as a result of higher fuel cost, lower generation and high interest and depreciation cost.

"Prices are off 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 for companies where there is a power purchase agreement in place; Coal India’s recent hike in prices may come as a respite. “The 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 may end up being a further drag on its financials. Both companies signed up for a lower tariff agreement for power sold from the Mundra units, which does not cover up for the rise in the Indonesian coal prices.

“Looking ahead, we believe that recent sharp up-tick 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 in India are also grappling with a 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. “Our sources indicate that prices are expected to remain stable-to-high in Q1 given the factors at play. Outlook for Q2 and beyond is unclear as a lot depends on Chinese production/import policies and weather conditions at coal producing regions,” Kannan added.