London: “An almost 50% fall in coal prices from the highs of three months ago has prompted widespread re-negotiation of purchase contracts by Indian trading companies,” sellers said.
Indian traders contacted said their companies were fulfilling all contracts but others were not.
“We are doing everything as normal but there are some others who have not been performing,” an Indian trader said while another commented: “It’s business as usual for our company.”
An Indian coal importing trader said: “It’s a question of how much of a loss we are all going to make. If you bought at $120.00 or $100.00 and can only sell at $70 or $80 you have to take a loss. There is still coal coming in and we have to sell it from stocks for whatever we can get.”
“Whatever they say, just about all of them are reneging on contracts, re-negotiating big time,” a European trader said adding: “There’s not one of them I’d call a reliable counterparty at the moment.”
India is expected to import around 35 million tonnes of coal from Indonesia and South Africa in 2008, rising to 50 million tonnes in 2009 because domestic supply cannot match surging power generation demand.
Almost all Indian traders importing coal this year had bought South African cargoes earlier in the year at prices of $120.00-$140.00 a tonne FOB Richards Bay for delivery during the fourth quarter and first quarter.
Indonesian coal of various grades was also bought for delivery over a period of several months to a year at lower prices than South African but prices which were roughly double current market levels.
Most of the coal imported into India comes via trading companies who supply small to large end-users. State-run trading company MMTC Ltd buys to supply state power generators.
Coal demand in India for cement and sponge iron (used to make steel) production has fallen sharply during the past two months, Indian traders said.
The global glut of steel has slashed demand for sponge iron in India, they said.
Small to medium-sized sponge iron producers make up 60% of the industry and many of them are going out of business and cancelling coal contracts, traders said.
Indian traders stand to make big losses if they cannot re-negotiate high-priced purchases they made months ago because prices and demand within India are weak and getting weaker.
Cement makers are using weaker cement prices as justification to re-negotiate coal contracts but they could still make a profit at the contract price, traders said.
Sponge iron, cement and power generating companies are refusing to honour high-priced contracts signed earlier in the year, traders said.
“The power generators are the worst, they are running from contracts, refusing to pay,” an Indian coal importer said.
“All my customers are demanding we cut the prices. They say you can deliver the coal but we won’t pay. I ask what they will pay and I don’t argue,” an Indian trader said.
Power generators have been tendering to buy up to 15 million tonnes of coal for delivery during the next few months to meet an unexpectedly steep shortfall in domestic supply.
Generators have tendered and re-tendered repeatedly during the past few weeks, sometimes awarding a tender and then cancelling.
“You only know you’ve really got the business with generators at the moment when they’ve paid you your money and you’ve delivered the coal,” an Indian trader said.
Many Indian end-users are genuinely having difficulty operating normally because they have limited working capital and banks are reluctant to lend, traders said.
Some end-users have told Indian traders supplying them they cannot pay at all for coal contracted months ago.
It has become increasingly difficult for end-users and Indian traders to open Letters of Credit (LCs) which they need to give their sellers assurance they will be paid for the coal shipped.
“You used to be able to organise LCs in a few days, a week. Now it can take three weeks or more,” one of the Indian trader said.