BackKumar Mangalam Birla, coal bull in the midst of bears?
In the coal auctions so far, Hindalco's bid has been the highest for the Gare Palma IV/5 block and chances are that this will remain so
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Mumbai: In the government’s coal auctions so far, Hindalco Industries Ltd’s bid has been the highest at ₹ 3,502 ($56.5) per tonne for the Gare Palma IV/5 block in Chhattisgarh and chances are this will remain so because the remaining auctions are those of mostly under-developed and cheaper blocks.
At a time when most indicators point to further softening of coal prices, how could the Aditya Birla group bid so much? Many are intrigued, especially because they know chairman Kumar Mangalam Birla to be an astute businessman.
“He errs on the side of caution," says one banker.
The bears point to the great plunge of the commodities super cycle and the Chinese slack as well as the global thrust on clean energy sources that hurts coal’s value.
Gas prices have become more attractive; governments, including India’s, are pushing renewable and nuclear energy with equal vigour.
And others have bid in line with the falling trend of coal—the power producers bid abysmally low, i.e. Jindal Power Ltd’s bid for Gare Palma IV/2 and Gare Palma IV/3 was at ₹ 108 per tonne in the “reverse bidding" for power producers though it got into a controversy for being too low.
The sinking prices since the first round of the auctions have strengthened the case of the coal bears. On Wednesday, ICE coal futures was at $53.2/tonne, down almost 14% from $61.8/tonne on 19 February when Hindalco made its bid.
“Coal is an industry in decline and…will almost certainly die out within the next 30 years if not sooner," says Lindsay Hughes, senior research analyst at Australian research firm Future Directions, expressing his own view.
The fear is if coal prices continue to plunge, Hindalco may find it cheaper to import coal, thus making its newly acquired captive mines redundant.
But a rudimentary comparison of landed price of imported coal at Hindalco’s Mahan plant in Madhya Pradesh as against that sourced from the newly acquired mine, shows that Birla has indeed been conservative in his bid and has ensured he gets a big cushion against future price falls.
To Wednesday’s coal price of $53.2 a tonne, add $11 for freight, $4 for port handling, $3.2 for a 5% import duty and $26 for rail freight from an eastern port to Mahan and it comes to $97.4 for a tonne of coal, or ₹ 6,038.8 a tonne, at the doorstep of the Mahan plant.
To transport the coal from its Gare Palma IV/5 mine in Chhattisgarh to Mahan, add $13 for freight to its bid of $56.5 a tonne. Add $15 for mining cost and royalty and coal cost would work out to $84.5/tonne, or Rs.5,239/tonne. As domestic coal is of lower quality, more of the resource would be needed to be put in the plant.
For Gare Palma IV/5 to be redundant, coal prices would need to fall by about $12 from current levels and that is the cushion this company is sitting on.
But then these are dynamic commodity markets where trends can do a U-turn in a matter of time. There are those that believe commodity prices have bottomed out and those who say that mines around the world will start to close if prices go further south, and that is the ground for a price recovery.
And Birla is betting on this.
Note: This blog has been updated from its original version
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