• Our global coal team expects international thermal coal prices to pick
up in CY11 ($101/ton for Newcastle coal vs. $95/ton in CY10), backed
by high China / India demand and supply / export constraints.
• We expect Indian IPPs to remain resilient to rising coal costs in the
medium term. 1) 81% of system-wide thermal coal is sourced from COAL
IN, which has seen a nominal 4.9% CAGR in prices over the last 10 years,
and is at a ~40-50% discount to international prices; 2) 73% (36% exNTPC) of ongoing projects in our coverage universe are insulated due to
regulated returns, and some PPAs have fuel cost pass-through as well-we
estimate a 10% rise in coal costs can raise average genco tariff by 5-6%.
• Long-term risks on both supply and pricing: 1) Firm guarantee by COAL
IN for only 50% of contracted quantity. As per JPM India mining analyst,
India is headed for a thermal coal shortage of 181MT by FY14 and thermal
coal imports could rise 2.8x from current levels. In our view, plants are at
risk of operating at lower capacity utilization or increasing their use of
imports, pushing up costs. Ongoing delays in developing captive coal
mining blocks could further tighten the situation. 2) Indian coal policy
makers are exploring pricing domestic coal at parity with imported coal, and
also a pool pricing mechanism. 3) End of regulated return era for new PPAs:
long-term risk of margin squeeze due to rising coal costs.
• Indian IPPs’ relative position and stock picks: TPWR benefits from
rising coal prices due to its stake in Indonesian coal mines, however past
coal price rises have been neutralized by cost hikes and bottom line flowthru has been limited. JSWE most at risk: 66% of its capacity is on ST
tariffs and all coal is sourced at international market rates. Lanco: Well
hedged fuel strategy, only 1.2GW on imported coal with regulated tariffs.
NTPC: All projects are regulated, coal cost is pass-through. Adani: sweet
coal pricing deal from Adani Enterprises protects it to large extent. RPWR:
captive mines + some pass-through protection in place for 38% of capacity.
• Indian IPPs shopping abroad for resources, with billions of dollars to
spend: we expect long-term benefits and the quest to intensify. Adani
Group spent an upfront US$455M for 7.8Bt Australian Galilee asset and will
pay royalties of A$2 for each ton of production. JSW Energy spent
US$414M for South African coal assets. TPWR was an early bird in
Indonesia, but has stated its appetite for more. GMRI has made smaller buys.
GVK and Lanco have reportedly bid ~US$1B for Australia’s Griffin Coal
which has 250-300MT of reserves. We expect a 5-year cycle for coal mine /
infrastructure development and hence benefits to accrue only post that.
