While world markets were busy talking about how prices of commodities like gold, crude oil, natural gas and copper were falling, there was another commodity that was silently slipping away. Coal futures touched a 12-year low as demand from the world economy slips and production of the fuel continues unabated.
The preferred choice of fuel needed to melt most metals and produce power has been the biggest victim of the recent slowdown. Benchmark API2 2016 coal futures closed at $52.85 a tonne, a level last seen in November 2003. Coal now trades at 75% of its all time high seen in early 2008.
Apart from the global slowdown, environmental reasons are also at play for the fall in coal prices. Green brigades have been pursuing governments and funds to reduce their dependence on coal.
Environmentalists have blamed coal as one of the main contributors for global warming.
The $850-billion Norwegian Government Pension Fund, the world’s largest sovereign wealth fund, has sold off almost all its investments in companies related to the coal industry. In India alone, the company has sold off investments worth Rs 622 crore in companies like Coal India, Adani Power, GVK Infra, NTPC, Lanco Infratech, CESC and Monnet Ispat, among others citing risks posed to the climate.
The fund has also sold shares of coal mining companies globally, including its investments in global energy majors across the globe. NGO activism and rise of popularity of shale gas have both contributed significantly from almost wiping out the coal mining industry in the US. Peabody, one of the biggest players in the coal industry, has seen its share price fall from $90 six years ago to less than $1 presently.
Sharp fall in coal prices have resulted in companies shutting down their operations and putting their mines on the block.
However, while coal prices and stock prices have fallen, value investors are eyeing the companies. Reports say that legendary investor George Soros has started picking up shares in coal mining companies like Peabody and Arch Coal. What has surprised market observers is that George Soros had demonised fossil fuels for years through his think tank and political contributions. Analysts feel that Soros’s move has more to do with valuations rather than ideology.
As far as India is concerned, falling coal prices brings with it positives as well as negative news flows. Since India is the third largest importer of coal, falling prices naturally benefits the economy. However, prices in India are set by the coal ministry and only a small portion is determined through an auction process. Coal India is contemplating to tweak its e-auction price to align with falling global coal prices. Furthermore, government has said that imports of coal will come down by three per cent next year despite higher consumption. Increased domestic production by Coal India and starting of new mines will help in increasing supplies.
Indian scenario is different as far as coal supply in the domestic market is concerned. Though there are no takers for coal mines globally, in India coal auctions have been well received. Over the next 30 years, government is expected to earn Rs 3 lakh crore from its three rounds of auctions. Fourth round of auctions are likely to be announced soon.
However, falling coal prices will have a bearing on government’s divestment plan. Coal India is expected to bail out the government through its Rs 23,000 crore divestment plan. Other public sector companies, mainly in the mining space have either deferred their divestment or are too small to make a meaningful impact. Though Coal India has been ring fenced on account of controlled prices, general perception towards the industry on account of falling oil and increased pressure from environmentalists will impact its subscription.