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Apex Court Order May Alter Coal Import Dynamics

Date 28-August-2014
Subject Apex Court Order May Alter Coal Import Dynamics

Power, mining, and banking stocks fell on Tuesday, as companies in each of the sectors wait for a 1 September verdict in which the Supreme Court, which ruled on Monday that all coal block allocations since 1993 are illegal, could actually cancel the assignments.

Meanwhile, international coal traders immediately downed a gear in talks for supply contracts with Indian companies because a cancellation could mean they could command higher prices from customers in the country. If that happens, global coal prices could increase, say experts, as could shipping rates.

While power and mining companies will be directly affected by the cancellation, banks could see the volume of bad loans on their books increasing with the viability of power and steel projects they have funded coming under question.

Shares of power and banking stocks fell for the second consecutive day on Tuesday, following the verdict. The S&P BSE Power index fell 1.32%, the S&P BSE Bankex index lost 0.24% and the BSE Metal Index rose 0.75%.

At stake are around 289 coal blocks given out to companies of all sizes individually or in consortiums, of which around 21 are producing mines with an output of about 35 million tonnes (mt) a year, according to a Macquarie report.A cancellation could mean more imports. India imported around 160mt of coal in 2013-14.

Foreign traders have been quick to spot the opportunity in the court’s ruling.“Indonesian miners are delaying any long-term negotiations…They are trying to assess the impact (of the ruling),” said Prakash Duvvuri, head of research at natural resources website OreTeam.

The ruling comes at an opportune time for them.Global coal prices have slipped over the past year. Premium hard coking coal from Australia was priced at $113 a tonne on Tuesday, free-on-board (without freight charges) at the east coast, down 19% from a year ago, data from Bloomberg showed.

“It is too early to say if prices will move but there will be an increase in demand of imported coal if running mines are cancelled,” said Vinay Prakash, chief executive officer (coal and carbon credit) at Adani Enterprises Ltd, one of the largest coal importers in India.

“If mass deallocations do happen, both coal prices and freight rates will shoot up on an expected increase in import volumes,” added Punit Oza, vice-president and head of Supramax Pacific at ship operator Torvald Klaveness Group in Singapore.

A top government official, requesting anonymity, said, “Clarity will only emerge after 1 September.” Banks that have exposure to metals and power companies are vulnerable in the wake of the Supreme Court’s verdict, and may see their bad loans rise, UBS said in a report on Tuesday.

“We believe a portion of banks’ exposure to metals/power would be vulnerable to becoming NPLs (non-performing loans) if the process of reallocation of coal blocks extends beyond six months,” UBS said.

A Morgan Stanley report said the development could have a serious impact on the economy. “Near-term coal deficit in the country may deepen and dependence on Coal India Ltd may grow for coal supplies,” the Morgan Stanley report said. Analysts attributed the sharp fall in stock prices to fears of a spurt in their cost of production if the apex court imposes a penalty or cancels allocations. In a note on Monday, Macquarie Capital Securities (India) Pvt. Ltd termed the move “really harsh.”

“We believe that, in the case of operational coal blocks, possible options could be penalties to regularize the coal blocks or a hand-over to Coal India. Unopened coal blocks could face deallocation. It is difficult to imagine that all this could be done quickly,” Macquarie analysts Rakesh Arora and Sumangal Nevatia said in the note. According to Karvy Stock Broking Ltd, banks have an exposure of Rs.5.01 trillion to the power sector, and exposure to the sector has grown from 4.3% of the non-food credit in March 2008 to 8.83% in the June 2014.

Bankers fear the worst if the coal blocks are deallocated. “Not only bank assets, coal is such an important item for practically everything, and if a sizeable share of the private producers shut suddenly, the impact on economy will be unimaginable,” said a senior banker who did not wish to be named.

According to the Reserve Bank of India, state-run banks’ gross bad debts as a percentage of total loans was 4.7% in March 2014. Analysts say power, steel, and infrastructure, so-called core sectors, will be hit hard. These sectors, along with textiles and aviation, account for 24% of the money loaned by banks, but half of the bad loans on the books of lenders.

As on 30 June, 16 cases involving loans worth Rs.20,253 crore in the power sector were being restructured, according to information available on the website of the corporate debt restructuring (CDR) cell.

“We expect part of this exposure to turn into NPAs (non performing assets) over the next 18 months as many of these projects will become unviable. We maintain our cautious view on the sector, specially on the public sector banks, which have relatively higher exposure to the sector,” Karvy analyst Asutosh Kumar Mishra said in a note.

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