As coal prices fall and China gets out of the seaborne coal trade, Indonesia may not want to rock the boat
Indian power generators can rejoice. The sharp rise in coal prices which had come to haunt them since 2010 may reverse to a large extent in 2013. Globally, coal prices have cooled off by 14-17 per cent over the last one year and prices are unlikely to recover anytime soon as demand from China is down sharply. China has been the largest buyer of coal in the seaborne trade. Given that it has increased its domestic production at lower costs, it is no longer buying coal from the global markets, especially Indonesia.
Along with gold and crude oil, the super cycle for other commodities too has run out of steam it appears. Power generators in India stand to gain from cooling coal prices as analysts say the fall is structural and not momentary. The spot price of Richards Bay (6,000 kcal/Kg NAR) coal is down 18 per cent in the last one year while the Newcastle (6,700 kcal/kg GAD) is 14.2 per cent lower.
The fall in coal prices is structural and led largely by weaker growth coming from China. According to Nomura, global investors remain underweight on the sector. Investors may turn positive on the coal sector only if there is some recovery in China. China used to be the largest buyer of coal in the seaborne market but given the rise in its domestic production, prices have fallen and China is no longer buying coal in the global market. Consequently, coal prices have declined below $90 a tonne, lower than analysts’ estimates of $95 a tonne, in the last couple of weeks. Nomura’s coal analyst Isnaputra Iskandar attributes this decline to higher-than-expected production from Indonesia.
Indonesia could reverse its coal export ban and delay implementation of levying an export tax on coal, believe analysts. Given that coal prices have dipped to $85 a tonne, the government of Indonesia may not want to do anything that may impact smaller coal miners. According to Iskandar, due to legal, technical and economic complexities in the coal sector, there is little probability that the government (of Indonesia) will implement either a coal export ban or coal export tax policy over the next five years.
Even in India, things seem to be getting better as the government is waking up to the issues faced by Coal India and the power sector. The environment ministry has granted clearances to 18 coal mining projects of state-owned Coal India. Of these, 14 have received environmental clearances and four forestry clearances. The coal ministry had sent a proposal to the Cabinet Committee on Investments to grant clearances to 12 coal mining projects. Once cleared, these projects would lead to an increase in coal production by 36.97 mn tonne and would see investments of Rs 13,470 crore. The power ministry has also suggested that surplus output from captive mines should be incentivised so that Coal India can get the extra coal from these captive mines. If all these measures fall in place, then the power sector could come out of the woods.