October 2014

CRISIL Insight

Long-term measures needed to address

burgeoning coal imports

Long-term measures needed to address burgeoning coal imports

Governments announcement on auction of coal blocks could provide some respite

Long-term measures needed to address burgeoning coal imports

Governments announcement on auction of coal blocks could provide some respite

CRISIL Insight

Long-term measures needed to address burgeoning coal imports

Governments announcement on auction of coal blocks could provide some respite
Industries dependent on coal have been grappling with supply issues in terms of both quality and quantity of coal
for a while now, as regulatory, infrastructure and production-related bottlenecks have led to domestic output
continuously lagging demand. Players in these industries will be forced to step up imports to bridge the
burgeoning deficit in availability of the fuel in the wake of increased capacities, bringing their profitability under
pressure.
Power, steel, and cement companies will continue to account for almost 90% of coal imports. CRISIL Ratings
believes the impact of higher imports will be felt more on the profitability of new coal-based power generation
capacities having no or only partial fuel price pass-through. For steel players, whose profitability has already
been affected by weak demand in the recent past, the key factor would be the ability to pass on rising costs to
customers given our expectation of a marginal increase in coal prices from current levels. CRISIL Ratings
believes an increase in domestic non-coking coal price will not have a significant impact on the operating
margins of cement companies, as most players are undertaking initiatives to improve cost efficiencies.
Although the six-month timeframe given to the 42 operating coal mines to wind up operations in the recent
Supreme Court ruling1 ensures that there is not much loss of production this fiscal, the uncertainty surrounding
their reallocation and the timelines thereof could have potentially added another 25 million tonne (MT) to Indias
coal deficit in 2015-16 (refers to financial year, April 1 to March 31).
However, CRISIL Ratings believes that the ordinance promulgated on October 21, 2014 for resolving the supply
issues resulting from the cancellation of mines, is a step in the right direction and provides a fillip to industry
players who lost their coal blocks because of the SC verdict. The ordinance aims at:

Re-allocation of the cancelled blocks

Allocation of coal blocks to state owned entities through a need based approach without auction
Creation of a pool of coal blocks which will be e-auctioned to private companies in the power, steel and
cement sectors through a transparent bidding process

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.

Domestic coal supply continues to lag demand; will push up reliance on

imported coal
At 123 billion tonne, India accounts for 14% of global proven reserves but only 8% - or 605 million tonne (MT) of
production. Collective domestic output from Coal India Ltd (Coal India, CRISIL AAA/Stable/CRISIL A1+), The
Singareni Collieries Ltd (CRISIL CCR AA) and captive coal blocks has consistently fallen short of the production
target set by the Government (refer chart 1), leading to a fifth of Indias annual consumption (123 MT non-coking
and 33 MT coking coal refer charts 2 and 3) being met through imports. Domestic coking coal supplies have
stagnated at around 17 MT for years.

Chart 1: Domestic Production v/s MoC Target

Chart 2: Non-coking coal consumption

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

Domestic Supply Non-coking

Others

Source: Ministry of Coal (MoC), CRISIL Estimates, MoC Target

2017
(P)

Source: Ministry of Coal, CRISIL Estimates

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)

Chart 3: Coking Coal Consumption

CAGR

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

Chart 4: Domestic production v/s Requirement

ply

Ga

up
in s

Domestic
supply

Coal
requirement

Ga

Domestic
supply

2014-15E

Domestic Supply Coking

Source: Ministry of Coal, CRISIL Estimates

Imports Coking

ply

ply

up
in s

in
ap

sup

Coal
requirement

2015-16E

Power sector @68% PLF

Steel sector

Others

Cement sector

Domestic
supply

Coal
requirement

2016-17E

Source: CRISIL Estimates

CRISIL Insight

Domestic coal prices set to increase in contrast to the trend in

international prices; still spurt in imports likely to impact profitability
given the significant price differential
Domestic prices of coking coal and higher grades of non-coking coal have been gradually catching up with
international prices. We expect domestic prices to increase around 10% as Coal India looks to cover increased
costs and reduced e-auction sales.

Chart 6: Coking Coal Prices

140

350

120

300

USD per tonne

USD per tonne

Chart 5: Non-coking Coal Prices

100
80
60
40
20

250
200
150
100

0
2009

2010

2011

2012

2013

2014

2015 (P)

Australia 6300 kcal/kg

Indonesia 4200 kcal/kg

India GCV 6100-6400 kcal/kg

(core sectors)

India GCV 4300-4600 kcal/kg

50
0
2009

2010

2011

Australia coking coal

2012

2013

2014

2015 (P)

Domestic coking coal

Source: Industry Reports and CRISIL Estimates

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.

Power industry to bleed the most; profitability of steel companies also at

risk; cement companies profitability somewhat cemented
New power capacities are likely to rely heavily on imported coal
The power sector, which accounts for more than half of Indias coal imports, will be affected the most by the
trifecta of woes lesser supply, higher prices and increase in imports. For existing units, the decline in plant load
factors (PLFs) in recent years has largely been due to coal shortage. Power plants operated at an average PLF
of 68% for the 12 months ended July 31, 2014. For the plants to run at their normative PLF (85%), we believe
coal imports will need to grow exponentially (See table 1). However, this, to an extent, is dependent on power
producers ability to pass on higher cost of imports in tariff.
Table 1: Expected domestic coal supply and imports required for expected generation capacities
Expected Coalbased generation
capacity

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

Table 2: Variable cost of generation at different levels of imports

Base Case

Scenario analysis

Domestic Coal

100%

65%

Imported Coal

0%

35%

Rs.0.81/kwh

Rs.1.59/kwh

Variable Cost of Generation

Fixed Cost of Generation

Rs.1.39/kwh

Rs.1.39/kwh

Total Cost of Generation

Rs.2.21/kwh

Rs.2.98/kwh

Power Tariff with Competitive Bid (fuel

Rs.4.00/kwh

Rs.4.00/kwh

Rs.1.79/kwh

Rs.1.02/kwh

price not pass through)

Profit Margin

43%
Basic Assumptions
Power plant capacity

1320 MW

Base cost of Domestic (G10) coal

Rs.860/tonne

Project cost

Rs.7920 cr.

Inland transportation cost

Rs.215/tonne

Landed cost after royalty etc.

Rs.1345/tonne

Distance from domestic coal source 215 km

Distance from nearest port

1000 km

GCV of coal

4500 kcal/kg FOB cost of Indoensian coal

Plant PLF

85%

USD 45/tonne

Freight cost

USD 11/tonne

Inland transportation cost per tonne Re.1/km

CIF cost in INR

Rs.3415/tonne

USD INR exchange rate

61

Inalnd transportation cost

Rs.1000/tonne

Case-1 bid tariff

Rs.4.00/kwh

Landed cost after duties, port handling charges etc.

Rs.5000/tonne

GCV: Gross Calorific Value

FOB: Free on Board
CIF: Cost, Insurance & Freight

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

40-160 bps with a

18.4%

$20 hike in coal

price through 2017

*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

Source: Industry Reports, CRISIL Estimates

Additionally, penalties approximating Rs.100 billion could have a telling

effect on the cash flows of entities operating these mines
Although fuel un-availability is not likely to impact the state-owned utilities (which account for a majority of the
producing coal blocks cancelled) as they will benefit from the ordinance, we do believe that the one-time penalty
will dent their profitability this fiscal. The penalty amount for power sector translates to roughly Rs. 61 billion
(accounting for an estimated 60% of the total penalty payments), a majority of which is attributable to stateowned power utilities. Cash flows of some of these state power utilities are already stretched, given that these
utilities are making losses and have combined debt of over Rs. 400 billion. Imposition of penalties will further
stretch their cash flows and they will find it difficult to fund the penalties.
Table 5: Penalty split amongst the key sectors
In Rs. billion

Estimated penalty

Percentage of total
penalty (%)

Power sector (PS)

61

61

Iron and steel industry (ISI)

30

30

91

91

PS+ISI
Estimated total

~100

Source: Ministry of Coal, CRISIL Estimates

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.

Quick decisions by the Government the key to combat rising imports

For now, the way forward to ensure raw material security seems to be through higher reliance on imports.
CRISIL Ratings expects Indias coal imports could comfortably cross 200 MT annually. With imports expected to
mount every year, it is imperative that measures to augment domestic output are taken. In addition, the focus
has to be on addressing challenges related to logistics and infrastructure, to cope with the anticipated rise in
imports. Major ports account for about two-thirds of the total coal imports are all of them equipped to handle
such a rise in quantity of imports? Although some of the ports are adding coal berths to augment capacity, lack of
adequate rail connectivity from ports to end users located away from the coastal belt is likely to constrain the
operating efficiency of the ports. Moreover, augmenting capacities and providing rail connectivity will require
environmental clearances and land acquisitions, which will require speedy action by the government like the
one taken on October 21, 2014!
4
With penalty levied at Rs.295 per tonne of coal produced, the gross amount to be paid as penalty approximates Rs.100 billion on the cumulative coal production
from the operating mines over the years.

About CRISIL Limited

CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are
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About CRISIL Ratings

CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a
tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over
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finance. We have an active outreach programme with issuers, investors and regulators to maintain a high level of
transparency regarding our rating criteria and to disseminate our analytical insights and knowledge.
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Last updated: August 2014

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