Coal shortage: Power, cement companies to be affected

If power producers continue to run plants below 50% PLF, further capacity additions may get impacted.

By now, it’s a well-known secret that power producers are in for tough times this year, with plant load factors (PLF) of several producers falling by as much as 20 per cent due to acute coal shortage. This pattern is likely to spill over into the new financial year too, since there just isn’t enough coal available to feed India’s steel and power production facilities.

Even as India’s new power producers were coming to terms with coal shortages in India, the floods and subsequent cyclone in Australia have come has a body-blow to cement, power and steel producers. Imported coal prices are up 44 per cent year-on-year, impacting profitability even further. A foreign brokerage house in its report has downgraded cement and power utilities, saying: “Following the emergence of worries over domestic coal availability coupled with recent tightening of global coal markets, we are beginning to get concerned about the resultant impact on Indian utilities and cement producers. For Indian power utilities, peak utilisation levels could drop 2,000 bps by FY14E supporting a demand growth of 6 per cent. For cement players already grappling with excess supply, the tightness in coal markets will likely exacerbate margin pressure.”

According to analyst estimates, Indian coal availability is expected to rise at a compound annual growth rate (CAGR) of only 4.2 per cent over the financial year 2010-14, which is insufficient to meet the power capacity growth of 10.4 per cent.

To make matters worse, merchant tariffs remained subdued during the third quarter due to good monsoons leading to muted demand growth (+5 per cent year-on-year) and higher hydro generation (+7 per cent y-o-y). Operating rates (PLF) would hence compress by 2000 basis points over FY11-14E, assuming other sources of capacity do not suffer from lack of fuel.

Availability of coal will not only affect plant load factors over the next few quarters, but this will also hit future capacities. However, running plants at a PLF of less than 55 per cent may result in the deferral of capacity-addition in early stages of development. Consequently, the brokerage firm estimates that medium-term spot rates will stay at Rs 4/unit versus the street’s expectation of a sharp decline.

However, the issues are slightly different for cement companies. Given that utilisation levels are already low, rising raw material costs will put further pressure on their margins and consequently, bottomlines. Production discipline may be one of few options for cement players, says the report.