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Coal piles up at ports as rupee makes buyers renege on contracts

Major Indian ports have more than 3.5 million tonnes (mt) of coal stockpiles because importers are refusing to take deliveries as the rupee’s fall against the dollar has made the landed price of the fuel unexpectedly high.
India’s coal imports of around 140mt a year are rising, encouraging many big and small import firms to mushroom, but few have been hedging their currency risk, which has contributed to the latest impasse.

“The stockpile in five major coal-importing, government-controlled ports is over 3.5mt,” said Punit Oza, senior chartering manager at ship operator Klaveness Asia Pte Ltd from Singapore. “The coal traders who have brought this coal to sell mostly on stock and sale basis are stuck with some of this cargo since the rupee is devalued and the buyers are unwilling to pay the higher rupee price due to the declining currency.”
Defaults have taken place and some importers have deferred their purchases, according to an executive in a large foreign coal-importing company based in New Delhi. The executive declined to be named.

Slowing coal imports will hit power producers, especially those that are located near a coast, as well as steel companies that depend on coking coal for making the alloy.
“Some ships destined to India are being diverted mid-route with the seller looking for other markets,” the executive at the coal importing company said.

Coal prices are softer in the international market, owing to an oversupply and slower purchases from China, but the rupee’s 13.85% devaluation against the dollar since the beginning of the year, has pushed up the landed price of coal. The currency fell to a record low of 68.85 against the dollar on 28 August.
Steam coal from Richards Bay in South Africa of 6,000 kilo calorie (a high grade) on a free-on-board basis (without insurance and freight) was priced at $71.34 a tonne on 6 September, down 19% from $88.1 a year ago, data from Bloomberg shows.
In India, the landed price of high grade steam coal originating from Richards Bay, inclusive of freight, insurance and port charges, was at Rs.6,350 a tonne, up 2.42% from Rs.6,200 a tonne a year ago, data from Oreteam, an information and data portal on metals and raw materials, showed.

The current coal prices are 12% higher than two months ago when many of the contracts were finalized following which the rupee plunged.

Power tariffs seen up
Imported coal-based power plants, many in the course of being commissioned, will be the hardest hit by the slowdown and merchant tariffs could likely rise, said an analyst.

Power companies imported about 120mt of coal and this is expected to keep rising by 15mt a year, said Girish Shirodkar, partner and managing director of Strategic Decisions Group. “Coal available (stockpiles) at the ports is just costlier and the power companies will pass it on to their clients,” Shirodkar said.

Eventually, a stable rupee and the softening of coal prices in the international market in the medium term may lead to softer and steadier imported coal prices in India in the medium term, but the growing imported coal-based power production will lead to higher average power tariffs, Shirodkar said.

Power tariffs could rise to Rs.4.3 a unit by December and further to Rs.4.3-4.5 a unit in the months ahead, he added.
Steel companies, in their eagerness to grab export markets to take advantage of the weaker rupee against the dollar will be willing to spend more on costlier coking coal which is imported, thus keeping the coal imports tap on.
After the rupee stabilizes and coal buyers start to renegotiate the sale of the coal cargoes at the ports, pace of imports will resume, according to Oza of Klaveness.

“This slump is a temporary one of maybe a month or two,” Oza said. “The level of imports in first eight months has been hectic and thus India should still surpass last year’s import levels, even with a slower momentum.”
India’s import of thermal and coking coal is seen at 170mt this fiscal year to end in March 2014, up from about 140mt in 2012-13, according to Oreteam.

Source: www.livemint.com