Coal block cancellations to hit power, steel sectors: ICRA, Fitch

The Supreme Court's verdict cancelling all but four coal mines allotted to private parties 1993 (See: Supreme Court cancels allocation of 214 coal blocks, spares 4 ) will have serious ramifications for the energy and steel sectors, hitting their bottom lines, and fines imposed alone could amount to Rs7,300 crore, rating agencies have said.

Earlier in the week, State Bank of India, said in its Ecowrap report  the Supreme Court's decision to cancel ther allocations would increase the current account deficit by $700 million on account of additional coal imports (Coal block cancellations to hit CAD, power generation: SBI)

 Both Fitch Ratings and ICRA said that after cancellation of blocks, the companies will have to depend on externally sourced coal, resulting in higher operating costs which would further put pressure on retail tariffs for the consumers.

The reports follow the Supreme Court earlier this week scrapping the allocation of 214 out of 218 coal blocks given to various companies since 1993 terming the allocation process as "fatally flawed".

"The decision is broadly credit-negative for these sectors ... companies with cancelled licences will not receive any compensation on account of development expenditure incurred to date, meaning these will have to be written off ... furthermore, they will now have to pay for externally sourced coal, resulting in higher operating costs."

"The SCI's decision also levies a fine of Rs295 per tonne on coal produced to date from the mines affected, which could amount to Rs7,300 crore," Fitch ratings said in a statement.

The negative financial impact will vary significantly depending on the company, it said, adding that the ruling has no immediate direct impact on Tata Steel and SAIL.

About the National Thermal Power Corp, it said, "Power company NTPC could be more vulnerable to the decision, though Fitch maintains that the broader impact will still be relatively small.

''Pakhri Barwadih, an NTPC mine nearing production, has been exempt from the cancellation. The status of the other nine of NTPC's 10 coal blocks is uncertain, as it is not very clear if they are also exempt ... the company had expected that its captive mines would be able to serve 4.3 per cent of its coal requirements in FY15 - rising further to 15 per cent by FY17."

The potential long-term effects of the decision on the wider power and steel sectors will depend largely on how quickly the government proceeds with re-auctioning the licences, it said.

Rating agency ICRA further said that as per its estimates, "aggregate penalty till March '14 for the power sector as a whole is at about Rs60,000 crore based on mining output of about 205 million tonne (MT)".

About 60 per cent of this penalty is attributed to state sector utilities / JVs, mainly owned / co-owned by corporations belonging to the states of Punjab, West Bengal, Karnataka and Rajasthan; while balance 40 per cent pertains mainly towards private sector IPP / utilities, it noted.

It added that the overall capacity in private IPP segment that would be affected by the SC order is around 18 GW, comprising a mix of operational projects (6.3 GW as on July 2014) and under-construction projects (11.4 GW expected to become operational over the next 2 year period).

"Any delays in allocation of coal blocks through bidding would lead to dependence upon coal sourcing from open market, ie through e-auction or coal imports, given the shortages in domestic coal availability .... this in turn is likely to increase the fuel cost of generation, which would impact their cost competitiveness," it said.