The calculus of major power projects in India banking on coal from Indonesia seems to be going horribly wrong.
The Indonesian government has, in an order, decided to link the price of coal exported from the country with a benchmark based on international prices of coal.
To boot, the new rule will be applicable retrospectively to all contracts.
Mining companies will have to modify all their old contracts by September 23, 2011, the Indonesian government has said.
That puts currently operational plants of Tata Power (the Mundra ultra mega power project in Gujarat), Adani Power, (also in Mundra), JSW (in Ratnagiri, Maharasthra) and Lanco Infratech (Udupi) in the line of fire because most of their feedstock comes from Indonesia.
At an analyst call recently, Tata Power said if an exemption is not got from the Indonesian government, coal prices for Mundra would go up by $30 or around Rs1,340 per tonne.
To keep the cost of production low at Mundra, Tata Power
had purchased a 30% stake in two thermal coal mines and
trading companies of Bumi Resources of Indonesia for $1.1 billion in 2007.
Tata Power, Adani Power and JSW officials could not be reached for comment over the weekend.
The new coal price benchmark is an average of monthly prices from four coal indices that include the Indonesian Coal-price Index or ICI, the Globalcoal Newcastle Index, the Newcastle Export Index and the Platts-1 Index, the Indonesian government has said.
Adani Power, which has long-term supply agreements and mining rights in the Bunyu Island of Indonesia, will also be severely affected since 70% of the requirements at Mundra is met with imported coal.
Adani was recently denied domestic coal linkage by the government for the current fiscal because of shortage.
The ministry of power has decided to not give coal to power plants based on more than 30% imported coal.
The 4,620 mw Mundra plant currently produces power from two 660 mw units.
According to an analyst with a domestic brokerage, Adani was buying coal from Indonesia at around $36 per tonne free on board (f.o.b) mother vessel. With the new rule, the landed price of coal is likely to go up by about 10% for Adani.
Indonesian coal had been traditionally sold at a discount of around 15% compared with fuel from Australia and South Africa.
“The overall implication would be complex to assess as it will depend on individual companies’ import content, proportion of non-regulated supply and the extant bid on escalatability of coal prices,” said the analyst who did not wish to be named.
Merchant power sales are price-sensitive, and while sellers may take some hit on their margins, overall volumes could certainly dip, he said.
“For other power companies too, the impact will vary in degrees, but would be negative for all those importing coal from Indonesia. Already Indian buyers are seeking other supply sources in Australia and Africa,” he said.
Kuljit Singh, partner, infrastructure practice, Ernst & Young, said the Indonesian government’s decision “will push up prices immediately and will affect the viability of those power plants in India that had assumed that coal will be available to the them at lower than market price”.