Supreme Court coal verdict leaves firms in a fix

Sudden darkness
33 captive coal blocks under production
19 belong to private sector
53 annual output at these blocks
18,000 mw – power production these are linked to

The 'Coalgate' scam has finally come to haunt India Inc.

Several steel, power and cement projects are facing imminent shutdown if the supply of coal dries up, following the Supreme Court verdict.

If the court finally orders a closure of blocks where mining is currently underway, an immediate scarcity of coal will hit the companies, forcing them to resort to expensive imports, in some cases.

The consequences arising from Monday's verdict that declared 200 coal blocks illegal are likely to considered by the court on September 1.

The ruling has left the industry, particularly the steel and power sectors, bewildered. Most of the companies that are hit are trying to figure out the ruling.

Since competitive bidding was held for the lowest tariff for power for Ultra Mega Power Projects (UMPPs) in accordance with the opinion given in Natural Resources Allocation Reference, the blocks allotted to mega power projects will not be cancelled. However, the apex court has directed that the coal blocks allocated for UMPP would only be used for UMPP, and no diversion of coal would be permitted.

According to brokerage CLSA, as of now, there are 33 captive coal blocks which are under production, of which 19 belong to private sector. The total production expected from all 33 captive mines in 2014-15 was 53 million tonne (mt). Key private sector contributors to this include Jindal Steel & Power (12.25 mt), CESC (2.8 mt), Hindalco (2.5 mt) and Reliance Power (2 mt).

Senior NTPC officials huddled into a meeting with the power ministry till late in the evening trying to figure out the implications, a director of country's biggest power producer told dna.

The government has so far allotted seven coal blocks to NTPC, of which Chatti-Bariatu in Jharkhand is likely to start by end of this fiscal.

The smaller ones, in the private sector, have been left to figure out what lies for them.

When contacted, a Tata Steel spokesperson said the company was in discussion with its legal representatives to understand the court decision. Hindalco spokesperson declined to comment.

"We are confused by what Supreme Court has pronounced and currently taking views of lawyers," said Manoj Agarwal, managing director of Adhunik Power and Natural Resources Ltd.

Like many others, Adhunik risks cancellation of block like the one in Ganeshpur in Jharkhand which was allocated to it in 2009 for its 540 mw power plant. The coal block was supposed to start production in November 2012. It hasn't yet and Agarwal has represented before the power ministry to consider its case, citing local law and order issues.

Cancellation of coal blocks following SC ruling could impact about 18,000 mw of power generation, Ashok Khurana, director general, Association of Power Producers said.

According to the coal ministry, production from 33 captive blocks during 2014-15 is projected at 52.9 mt. Of these, 13 belong to the power sector including UMPP of Sasan Power.

"These are linked to power production of about 18,000 mw of power among other sectors," Khurana said.

The government has allocated 195 coal blocks to various public and private sector companies.

"The judgment deepens the power sector crisis. However, it also removes a lot of uncertainty which had built up during the tenure of this case. Immediate remedial steps are required to be put in place by the government to mitigate the adverse implications of the judgment, that is the expected fall of output from these mines. Otherwise, the coal deficit situation will worsen," Khurana said.

The Inter Ministerial Group in February studied all the 61 captive blocks allocated to private sector for specific end-use based on the recommendations of the screening committee which have not come under production. Following this 31 blocks were recommended for deallocation. Out of the 30 remaining, the IMG reviewed 10 blocks environmental and forest clearances by the cut-off date of February 5, 2014.

The biggest fallout for corporate India following the ruling would be trust deficit that would come about, many believe.

"If a mine is allocated today, there is now no guarantee that it wouldn't get deallocated at any time in future. Also, every investment in mine development comes partly from debt.

In coming days raising bank loans would be hard to get for mining projects," said an industry official.

"It is too early to interpret anything. Clarity would emerge in the next hearing. However, any stoppage in coal mining would lead to higher imports," Prakash Duvvuri, head of research at OreTeam, said.

JSPL and Hindalco to be hit hard
JSPL and Hindalco are among the companies that were hit hard on local stock exchanges. According to CLSA, the current producing coal blocks of JSPL were allocated to the company in 1996 and 1998.

"De-allocation of the existing coal blocks will hurt profitability levels of JSPL's existing steel and power businesses. In addition, this reduces the probability of the Utkal B1 coal block coming through for JSPL, which lowers the longer-term profitability outlook for JSPL's greenfield steel plant at Angul in Orissa," Giriraj Daga, a senior analyst at Nirmal Bang, said.

This judgment substantially reduces the probability of Hindalco getting the Mahan coal mine for the Mahan smelter or the Talabira-II coal mine for the Aditya smelter, lowering the long-term profitability outlook for the India business of Hindalco.

Mahan coal block is not operating currently and is more likely to get de-allocated. Around 25% of Hindalco's existing aluminium output (from Hirakud smelter) is backed with captive coal from the Talabira I coal mine which was allocated to Hindalco in 1994. De-allocation of this mine will impact profitability of Hindalco's existing operations. This may have around 12-15% impact on the company's domestic operations.