Fall In International Coal Prices Will Not Benefit The Power Sector

After being hit by many negatives in the last few years, there seem to be emerging some positives for the power sector. Recently a tariff hike was implemented in states like West Bengal, Tamil Nadu, Delhi, etc and it is believed that a few other states will also follow suit. The PMO’s office, coal ministry and the power ministry also seem to be very serious about resolving the power crisis situation in the country.

And although coal production has not shown any overnight increase, the government has asked the coal ministry to de-allocate the private sector coal blocks and give them to Coal India. Besides, it has asked Coal India to appoint mine developers and operators (MDOs) in order to expedite coal production from these mines.

On the international front the coal prices have cooled off. The demand for coal has declined a bit, as reflected in the coal prices. The Indonesian coal reference price in the last one year has come down by 14 per cent and there is mixed opinion about whether the coal prices will down any further from here on. The cooling of the international coal prices looks good for the Indian power sector which has some of the companies importing coal from Indonesia.

Also, the coal prices in other countries such as Australia, South Africa, etc have also shown a significant decline. The Newcastle Index (Australian coal price index) is down by 18 per cent while the Richard Bay Index (South Africa) is also down by 19 per cent. The higher drop in the coal prices is seen in the DES ARA Index which is down by nearly 30 per cent.

Table - International Coal Prices In Last Three Months (USD/Tonne)

The fall in the coal prices can be attributed to the over-supply situation created due to the availability of cheap natural gas. The U.S. has been replacing coal with cheap natural gas. Besides, the fall in industrial activity in many countries has also helped the coal prices show correction of between 20-30 per cent in one year’s time. The slowdown in the Chinese economy has resulted in lower coal consumption and thus the Indonesian coal prices have shown a decline.

The situation may look good for sectors dependent on coal such as power, steel and cement but one needs to consider the national currency which has depreciated by a whopping 27 per cent during this time. Therefore, the net impact will not be on the profits of the companies. Moreover, from here on the coal production is likely to be cut and this will increase the coal prices. According to an article in Economic Times, the coal prices from here on will have a limited downside and hence the fall in coal prices would not benefit companies engaged in the Indian power sector.