Indonesian tremors spark fears of coal crisis among power companies

A massive earthquake off Indonesia on Wednesday rattled investors and sparked fears of a fresh crisis in coal supplies to the beleaguered domestic power sector.

Shares of power generators, who are already struggling with issues relating to price of coal from Indonesia, fell around 2% as against a fall of 0.3% in Sensex.

"This is a knee-jerk reaction to the news as it is too early to assess the damages," said G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management.

"Power companies are highly leveraged and there are concerns over fuel supply, interest rate, changes in Indonesian policy that have impacted the cost of imported coal. The earthquake has added to the negative sentiment," he said.

Some Indian power firms have coal supply agreements with Indonesian firms and investors fear that operations will be affected in case of large-scale damage.

Tata Power, Adani Power and Reliance Power have bought coal assets in Indonesia to fuel their projects in India, while others like JSW Energy and Lanco Infratech have fuel supply pacts with miners and traders there.

A powerful earthquake followed by an equally massive aftershock hit Indonesia on Wednesday, triggering tsunami warnings in 28 countries and reviving memories of the dreadful Boxing Day tsunami of 2004 which killed about 2.3 lakh people.

Executives from Indian power utilities said that they were in the process of getting in touch with their Indonesian officials, associates, traders and government authorities to assess the impact of the earthquake. Some said the initial reports suggest that the mines may not have been affected, but fear that logistics infrastructure may have been hit.

"We are still trying to get information, but there would definitely be some impact on supplies," said Ashok Khurana, director general of Association of Power Producers. "Most power utilities have inventory for 15-20 days, and supplies for another 3-4 weeks is sea-bound, so there would be a lag effect," he said.

India, one of the biggest importers of Indonesian coal, currently runs around 9,000 MW of capacity on coal from the country, with another 10,000 MW under execution. Mega projects of companies, like Tata Power and Reliance Power, have been hurt after Indonesia decided to link coal prices to international benchmarks, making the coal from the country almost 150% more expensive.

To add to their woes, Indonesia is planning to impose 25% tax on coal exports in 2012, and scale it up to 50% next year to prevent overexploitation of its mines. According to estimates, Indonesia's coal output is seen rising to 390 MT in 2102, with the biggest share of its exports going to China and India. India is likely to source around 120 MT of thermal coal from Indonesia this year, surpassing China.