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CRISIL Insight
To flag off the process, the 42 cancelled operating mines and an additional 32 mines in various stages of
development are expected to be put up for auction in the first phase. This, in CRISIL Ratings' view should enable
players to regain the producing coal mines that got cancelled. A time-frame of three to four months has been
indicated for wrapping up the process. CRISIL Ratings believes that if the process is completed within the
indicated time, the loss of production resulting from the transition in ownership can be restricted to about one to
two months at ~5 MT in 2015-16.
Coal imports this fiscal will nonetheless touch 220 MT (~27% of domestic demand) from 160 MT in 2013-14. The
need of the hour is speedy reforms and decisions by the Government of India to address challenges related to
infrastructure and policy. The government is certainly headed in the right direction with the ordinance, which
along with the reallocation of the cancelled mines also includes an enabling provision for the introduction of
commercial mining in future, which can be the long-term solution to burgeoning coal imports.
1
The Supreme Court (SC), in its verdict on September 24, 2014, cancelled 204 of the 218 coal blocks allotted to the private sector and state government
undertakings between 1993 and 2010 after having termed the process followed for allocation of these coal blocks as legally flawed in a ruling on August 25,
2014.
39 MT
shortfall
700
192
700
500
178
600
Million Tonne
Million Tonne
CAG
800
CAGR 2.3%
600
0%
R 1
900
400
300
200
100
500
110
122
488
507
518
2012
2013
2014
49
49
71
458
488
483
2009
2010
2011
38
208
400
300
200
572
594
2015
(P)
2016
(P)
661
100
0
Actual Target Actual Target Actual Target Actual Target Actual Target Est. Target
2010
2011
CIL
2012
2013
SCCL
2014
2015E
Imports Non-coking
Others
2017
(P)
Through 2017, CRISIL Ratings estimates demand for non-coking and coking coal to grow at a CAGR of 10% and
8%, respectively (refer charts 2 and 3), driven by requirements in the power, steel and cement sectors. This will
result in a consistent gap in domestic supply of coal against the demand over the next three years (refer chart 4)
10%
Million Tonne
60
50
40
30
32
36
33
42
49
46
24
25
17
17
16
16
16
17
17
17
17
2009
2010
2011
2012
2013
2014
2015
(P)
2016
(P)
2017
(P)
19
20
10
0
1000
900
800
700
600
500
400
300
200
100
0
Million Tonne
70
ply
Ga
up
in s
Domestic
supply
Coal
requirement
Ga
Domestic
supply
2014-15E
Imports Coking
ply
ply
up
in s
in
ap
sup
Coal
requirement
2015-16E
Steel sector
Others
Cement sector
Domestic
supply
Coal
requirement
2016-17E
CRISIL Insight
140
350
120
300
100
80
60
40
20
250
200
150
100
0
2009
2010
2011
2012
2013
2014
2015 (P)
(core sectors)
50
0
2009
2010
2011
2012
2013
2014
2015 (P)
In comparison, international coking coal prices are expected to increase only marginally this fiscal from current
levels of about $110 per tonne (refer chart 6), while international non-coking coal prices are expected to remain
at current levels (refer chart 5). Increase in coal supply from new capacity additions in Australia, South Africa and
Colombia is expected to lead to oversupply amid weak global demand. Impact on demand due to possible
import curbs on low-quality coal in China is expected to be partially offset by an increase in imports by India.
Domestic supply will lag demand and although international prices are expected to be on a more benign course
in 2014-15, a significant spurt in imports coupled with the notable price differential between domestic and
international non-coking coal prices (four times costlier than domestic coal), will hurt the players. Coking coal,
which is majorly imported, could see prices picking up marginally through the fiscal from the current levels,
stabilising at around $120 per tonne, with a moderate uptick in steel demand in the final quarter.
2014-15 (P)
Domestic
coal supply
Coal
requirement at
68% PLF
Imports at
68% PLF
Coal
requirement
of 85% PLF
Imports at
85% PLF
574 MT
144 MT
717 MT
287 MT
159 GW
430 MT
2015-16 (P)
170 GW
450 MT
611 MT
161 MT*
763 MT
313 MT*
2016-17 (P)
180 GW
495 MT
648 MT
153 MT
810 MT
315 MT
*Domestic coal supply for power sector in 2015-16 could dip by about 5 MT due to loss of production from the cancelled mines
Since April 2010, about 56 GW of coal-based capacities have come on stream (until June 30, 2014), out of which
CRISIL Ratings estimates 27 GW to be at risk, underpinned by domestic fuel shortage, no or partial passthrough of higher fuel cost and weak counterparties. Under the new fuel supply agreements being inked by
power producers with Coal India, the domestic coal supply is restricted to 65% and 67% during 2014-15 and
2015-16, respectively, with the balance requirement to be met through imports. In such a scenario, the weighted
average cost of fuel per unit of electricity generated may double for plants located away from the coastline (See
table 2). Hence, profitability of the newer coal-based generation capacities having no or partial fuel price passthrough will be impacted considering these are likely to rely heavily on imported coal, which is around four times
costlier than domestic coal.
CRISIL Insight
Scenario analysis
Domestic Coal
100%
65%
Imported Coal
0%
35%
Rs.0.81/kwh
Rs.1.59/kwh
Rs.1.39/kwh
Rs.1.39/kwh
Rs.2.21/kwh
Rs.2.98/kwh
Rs.4.00/kwh
Rs.4.00/kwh
Rs.1.79/kwh
Rs.1.02/kwh
Profit Margin
43%
Basic Assumptions
Power plant capacity
1320 MW
Rs.860/tonne
Project cost
Rs.7920 cr.
Rs.215/tonne
Rs.1345/tonne
1000 km
GCV of coal
Plant PLF
85%
USD 45/tonne
Freight cost
USD 11/tonne
Rs.3415/tonne
61
Rs.1000/tonne
Rs.4.00/kwh
Rs.5000/tonne
Power projects located in eastern states closer to mines and ports are on a much better wicket. But those
located away could see profitability falling by approximately 40% at an import run rate of 35%.
The focus therefore devolves, at least in part, on fuel supply logistics. A major part of the capacities currently
under implementation are located away from the ports. Over the next five years until 2018-19, CRISIL estimates
about 51 GW of coal based capacities to be added. For power generation targets to be met, rail infrastructure will
need to be strengthened. Ability of ports to handle large vessels will play a decisive role, too.
Pick-up in demand and ability to pass on raw material price increase - two
determinants of steel players ability to sustain profitability
CRISIL Ratings believes that primary steel makers2 are likely to sustain their EBITDA margin in 2014-15 close to
18.4%, with imports in the range of 70% to 74%, driven by coking coal prices stabilising around $120 per tonne.
Coking coal price, on its own, is not likely to dent the EBITDA margin of steel players significantly going by
current level of prices. CRISIL Ratings assumption of a $20 increase in coking coal prices through 2016-17,
could contract EBITDA margin by about 40-160 bps. The impact could be mitigated by the extent to which
companies are able to control other cost hikes coupled with their ability to pass on increasing costs to the end
users, especially in a subdued market. Understandably, if the coking coal price surpasses our expectation in
2015-16 and 2016-17 with companies not being able to pass on a fair share of the increased costs to end users,
higher imports could eat a sizeable share of the steel companies profits.
EBITDA margin vary depending on the mix of domestic and imported coking coal used. If a company that imports
around two-thirds of its requirement increases it to the entire requirement, its EBITDA margin could drop by
about 200 basis points (bps) even at the current low price of coking coal.
As a nation, India imports about two-thirds of the coking coal requirement. We see the steel industrys coking
coal requirements growing at a compounded annual growth rate of 8% through 2017, given capacity additions
and stagnant domestic supply, leading to an increase in import volumes to above 40 MT from roughly 33 MT in
2013-14 (see table 3).
Table 3: Expected domestic coking coal supply and imports required for increasing steel production
Steel
Production
Coking Coal
Requirement
Domestic
coal supply
Imports
2014-15 (P)
77 MT
59 MT
17 MT
42 MT
2015-16* (P)
86 MT
66 MT
17 MT
49 MT
2016-17* (P)
90 MT
63 MT**
17 MT
46 MT**
Base
average
EBITDA
margin in
2013-143
Impact on profitability
*Coking coal price assumed to increase to $130 per tonne in 2015-16 and $140 per tonne in 2016-17 from an estimated $120 per tonne at March 31, 2015;
realisation per tonne is assumed to be constant
**Marginal decline in coking coal requirement based on the assumption of availability of higher quality iron ore
Cement manufacturers are unlikely to see their operating margins dented much
For cement companies, coal cost averages between 14% and 20% of the cost of production. So a 10% increase,
ceteris paribus, will shrink EBITDA margin by barely 100-200 bps across companies. We believe the cement
sector will account for about 11-12 MT per annum of the overall coal imports (see table 4).
2&3
Players looked at: Major players accounting for over 60% of Indias primary steel installed capacity
CRISIL Insight
Table 4: Expected domestic coal supply and imports required for increasing cement production
Cement
Production
Coal
Requirement
Domestic
coal supply
2014-15 (P)
251 MT
30 MT
20 MT
10 MT
2015-16 (P)
262 MT
31 MT
20 MT
11 MT
2016-17 (P)
277 MT
33 MT
21 MT
12 MT
Impact on
profitability
Imports
100-200 bps
with a 10% hike
in coal price
Estimated penalty
Percentage of total
penalty (%)
61
61
30
30
91
91
PS+ISI
Estimated total
~100
Similarly, players in the iron and steel industry account for about 30% of the total penalty payments. Although, on
an aggregate basis, they are in a better position to cope with the penalty payments compared with state-owned
power utilities, we do see a near-term risk to the cash flows of these companies as well.
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