India is already the world’s third-biggest importer of coal, but the country could see its demand rise even more in the wake of a Supreme Court ruling earlier this week. On Monday, roughly 218 coal licenses granted between 1993 and 2010 were found to have been awarded illegally, according to Reuters.
Of those blocks, just 30 are currently operational. Australian bank Macquarie is saying that if India cancels the licenses following an upcoming hearing, the country’s annual coal imports will increase by $3 billion.
Most of the controversy surrounding the coal blocks relates to a decades-old method for granting coal concessions. An article from Bloomberg View states that the process was “completely discretionary and arbitrary” in that “[b]ureaucrats picked the well-connected winners one-by-one.” There were rarely advertisements for the coal concessions, and there was no open bidding process.
What’s more, the process has resulted in “captive mines” at which companies produce coal for their own facilities, but don’t sell it on the open market. That’s a key concern for India’s coal-starved power sector, but it isn’t a problem that will be solved by the court’s recent ruling. Writing for Bloomberg, Dhiraj Nayyar points out that Coal India (NSE:COALINDIA) is currently the only company allowed to sell coal on the open market anyway. That monopoly means the company comfortably takes in profits while refusing to up production even as India faces blackouts.
As for the companies involved in the now illegal coal concessions, most will take heavy stock price hits should the licenses be cancelled, Reuters said. The news outlet identifies Jindal Steel and Power (NSE:JINDALSTEL), Hindalco Industries (NSE:HINDALCO) and Sesa Sterlite (NSE:SSLT) as companies that could stand to lose after spending billions on the coal blocks.
It will be a long road, but according to Reuters, India’s relatively new Prime Minister, Narendra Modi, is committed to tackling “crony capitalism” and providing power to residents. However, as G. Chokkalingam of research and fund advisory firm Equinomics notes, “[a] clean slate will come, but with a huge cost. Legally it will be right, but practically it will be a disaster.”
Blackouts on the horizon?
India uses coal to generate roughly two-thirds of its electricity, but as Coal Investing News has previously noted, the country’s stocks are at critically low levels — in July, six coal-fired electricity plants wouldn’t have lasted even a day if their supply was disrupted.
It’s thus unsurprising that this Thursday, when Adani Power (NSE:ADANIPOWER) cut its power output by 2,300 megawatts due to a coal supply shortage, the country’s power generation capacity fell roughly 9,110 megawatts short of potential demand at peak periods during that day, according to Reuters.
An official from Power Grid Corporation of India (NSE:POWERGRID) commented on the issue, stating, “[a]s of now there is no major supply cut, but if the output is not increased soon, we may see outages in some states. We have asked the states not to draw excessive power.” On the possibility of further dips in supply he said, “[w]e are monitoring the situation and are hopeful that there will not be major disruptions.”
Still, Coal India has not made a move to ramp up production. Even more frustrating is the fact that despite a severe domestic coal shortage, India sits on the fifth-largest coal reserves in the world.
Good news for international producers
For investors interested in the international coal market, however, India’s coal woes could be good news. There are indications that demand from China could be set to slow down, and Australian producers tied to take-or-pay contracts are continuing to churn out coal even at a loss. However, if Indian imports increase, the country could eat up a hefty portion of the global surplus.
Case in point: The Wall Street Journal recently cited estimates by Wood Mackenzie, suggesting that in light of mine closures due to Monday’s ruling, India needs to up its imports even more than previously projected. That demand will account for 88 percent of the seaborne thermal coal surplus for 2014, while the extra coking coal needed by Indian steel mills “should cover the oversupply in that market.” No doubt, even with increased imports already projected for India, international investors in both thermal and coking coal will be watching to see whether the latest developments in the country will help balance global markets.
Another Supreme Court hearing, which will decide whether the coal concessions will officially be cancelled or not, is slated to begin on Monday.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.