Power sector expected to underperform

Coal, the major fuel for power generation in India has become scarcely available due to the recent Telangana crises in Andhra Pradesh. With the workers of Coal India and Singareni Collieries company limited going on strike over compensation and political reasons we have tried to assess the impact of this on the power sector.

Coal India is the largest coal producer in the world. More than 300000 union workers went on a one day strike demanding higher productivity bonus. This caused a loss of about 1 million tonne worth Rs 120 crore to CIL. Beside CIL is set to miss its FY12 coal production targets due to the adverse weather in the North Eastern states. CIL coal production is already down by 20MT this year. With Coal India already suffering headwind of low production, the burning issue of separate Telangana has affected the coal production in Andhra Pradesh very severely. Over 8 lac workers including workers from Singareni Collieries company limited (SCCL) in Andhra Pradesh have gone on indefinite strike supporting their cause for separate Telangana. SCCL which is the second largest coal producer in India has already incurred a production loss of 3MT this year before the strike. Now with all mining activity stopped company has suffered more than 2.8 MT of production loss worth Rs 350 crore by September 07, 2011. 

This is an alarming bell for power companies and captive power producers as both the companies provide more than 81 per cent of coal to the power companies. SCCL for example supplies 12.25 MT of coal to Andhra Pradesh generation company (APGENCO), 2.5 MT to Maharashtra, 3 MT to Karnataka and 10 MT to NTPC. Power plants in these entities are already feeling the heat with inventories down to 7-15 days. This has serious consequences over the industrial activity in the country.

We are of the opinion that above mentioned events will have a profound impact on coal prices.CIL Chairman Mr NC Zha has already indicated that domestic coal prices may raise after the wage dispute is resolved. In case of SCCL, production has severely declined and as per media statements wage hike is also on cards. With both the coal companies hinting price hike, coal prices will increase in the domestic market. Beside Planning commission deputy chairman Montek Singh Ahluwalia also wants domestic energy prices linked with global prices, which further boosts our estimation of coal prices.

According to the estimates the total domestic coal availability for FY12 will be 629.91 MT, against total demand of 713.24 MT. The net deficit of 83.33 MT would be met through the coal imports. According to coal ministry this figure of 83.33 MT would rise to 110 MT in this fiscal. As per our estimates this figure would be higher than 140 MT due to the depletion in coal production. This will increase India’s coal imports. The international coal prices have already rose to the uncomfortable level. Coal price in India ranges from Rs 3393 to Rs 3690 per MT for thermal coal while that in the international market ranges from $ 116 to $ 123 MT.  The internal benchmark prices work out to be double than the domestic price. 

Table 2 Global coal indices by Sept 2011

By analyzing the historical coal prices in international market there is no sign of cooling of the coal prices. The prices have increased by 60-65 per cent in last two years. We believe this imposes a big risk to the upcoming power plants, mainly Ultra Mega Power Plants (UMPP) like Mundra UMPP of Tata Power.

It is very difficult to quantify the impact in numerical terms. According to Central Electricity authority (CEA), NTPC is the major affected power utility followed by the state level power generation plants in Punjab, Haryana, Maharashtra, and Andhra Pradesh. By 14th October 2011, as many as 29 thermal power stations (Coal based) were operating with the coal inventory of less than four days. The cumulative capacity of these stations together is more than 41000MW. Worst is that nearly 44 power stations are left with coal inventory of less than 7 days. Residential areas have already been in the darks. The prolonged power cuts have been extended in industrial areas in the above states. The net impact will be seen right from power companies to the companies which don’t have captive power plants. However we believe this is a part of the big value chain in the industry and hence impact would be on the industrial production which already has eroded as per recent data. 

We believe that NTPC will have a big impact on its annual revenues. Adani Power, Lanco Infratech and Tata Power will also get impacted due to the imported coal issue. Sentiments over Telangana issue are very high and government has not come out with solution on the same prolonging strike and impacting economic activity. We expect sentiments to remain negative and sector to under perform this year as well. It is better to stay away from power sector.