NTPC Plans $15 Billion Coal Import Contract: Corporate India

By Kartikay Mehrotra - May 23, 2012

NTPC Ltd. (NTPC), India’s biggest power producer, said it plans to spend as much as $15 billion over a decade to secure overseas coal supplies as prices of the fuel tumble to a 19-month-low.

The utility may sign five- or 10-year contracts for the first time to import as much as 150 million metric tons of coal, Chairman Arup Roy Choudhury said by telephone from New Delhi yesterday. The cost will be $15 billion, assuming a rate of $100 a ton, he said. Production constraints at state monopoly Coal India Ltd. are forcing the New Delhi-based generator to step up purchases abroad.

“With coal prices where they are, this could be a good time to lay our foundation for future imports,” Choudhury said. “If we need more, we’ll buy it as we have in the past, 4 or 5 million tons at a time.”

State-owned NTPC is seeking to tackle bottlenecks after its failure to meet targets for generation and capacity addition sent its stock tumbling to a 3 1/2-year low last week. The country’s biggest utility needs to ensure availability of fuel as Prime Minister Manmohan Singh plans to spend $400 billion over the next five years to reduce blackouts in the world’s second-fastest growing major economy.
Shares

Shares of NTPC fell 0.2 percent to 141.05 rupees as of 9:54 a.m. in Mumbai trading. The stock is headed for a third annual loss, having declined 12 percent this year, compared with a 3.7 percent gain in the benchmark Sensitive Index. (SENSEX)

“Because of industry struggles, NTPC shares have scraped the bottom of the barrel,” said Rohit Singh, a Mumbai-based analyst with IDBI Capital Market Services Ltd., who has a buy recommendation on the stock. “They have taken a realistic approach to addressing the industry’s problems and should be on their way back up.”

NTPC posted its second straight drop in quarterly profit in the three months ended March 31 after fuel costs increased and its tax burden more than doubled. Power producers are paying almost double the price for imported coal to make up for the local shortfall, pushing up costs.

Rising U.S. coal exports and slowing economic growth in China, the world’s biggest importer of the fuel, have caused Asian benchmark prices to slide, according to Sanford C. Bernstein & Co. Power station coal for loading at Australia’s Newcastle Port fell 17 percent in the past year to $96.95 a ton in the week ended May 18, the lowest level since Oct. 8, 2010, according to IHS McCloskey data on Bloomberg.
Capacity Addition

Indian demand for imported coal is set to exceed China’s in the coming years, according to Bernstein, as the South Asian country adds to its installed capacity of 201.6 gigawatts.

NTPC is boosting imports even after Prime Minister Singh ordered Coal India, the world’s largest producer of the mineral, to sign fuel supply agreements with power companies. The utility, which plans to add 4,660 megawatts in the financial year ending March 31, has balked at signing a deal with Coal India. (COAL)

The fuel supply agreement would fail to penalize Coal India if it doesn’t meet its obligations, Choudhury said. While NTPC is in direct negotiations with Coal India, power companies have written to Singh’s office seeking liability against Coal India should the company fall short of its supply volumes.
Peak Deficit

“Falling coal prices provide an opportunity for everybody involved,” Michael Parker, a Hong Kong-based analyst at Bernstein, said in an interview on May 20. “NTPC will shore up its supplies while taking some of the heat off Coal India. This could be a sign of things to come across the Indian industry, which could catch up with China in imports.”

NTPC targets a 25 percent increase in coal imports to 16 million tons this year. It currently has an installed capacity of 37,514 megawatts, or 19 percent of the country’s total.

About one in four Indians lives without electricity as supplies aren’t enough for the entire population. The country plans to add 76 gigawatts of capacity in the next five years to help revive economic growth to 9 percent from 6.1 percent in the quarter ended Dec. 31.

India’s peak power deficit, or the shortfall in supplies during periods of high demand, was 9.5 percent in March, according to the Central Electricity Authority.

NTPC has rights to develop three coal mines in India with combined reserves of 2.8 billion tons, which won’t start production before 2013. Rivals, including Tata Power Co. (TPWR) and Reliance Power Ltd., have acquired stakes in Indonesian and Australian fields or local coal mines to secure fuel supplies.
Coal Output

NTPC, which achieved 65 percent of its capacity addition target for the year ended March 31, has $3.9 billion in cash and equivalents.

Coal India plans to lift output by 6.4 percent to 464 million tons in the year that started April 1 after missing its production target the previous year because rains stalled operations and environmental approvals for new mines were delayed. The prime minister’s office asked the mining company to sign supply accords with power companies and import the fuel if needed.

Industrialists including Anil Ambani, chairman of Reliance Power Ltd. (RPWR), Gautam Adani, chairman of Adani Power Ltd., and Tata Power Chairman Ratan Tata met Singh in January to seek increased coal supplies from local mines, faster environmental approvals for projects and tariff reforms that would allow utilities to pass on an increase in costs.
Cost of Power

“Agreeing to coal on a sheet of paper doesn’t solve the long list of problems for NTPC,” said Jagannadham Thunuguntla, chief strategist for SMC Global Securities Ltd. based in New Delhi. “India still has to help states afford the cost of power and there still isn’t a clear land acquisition policy for new plants. While this is good, NTPC still has a long road ahead.”

NTPC will close bidding on a 5 million ton coal import order on May 30 then begin developing terms for their long-term deal, Choudhury said.

“By agreeing to a bulk deal, this will make my power cheaper and more desirable for cash-strapped buyers,” he said. “Profit is an afterthought right now. If we meet our capacity and generation goals, then higher profits will follow.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net.

To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net
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