India has finally followed through on its threat to cancel coal mine permits, with 98 percent of permits given to companies in the last 20 years officially canceled on Wednesday. The ruling could raise the price of a commodity that has been dropping for the past six months.
Roughly 214 coal licenses granted between 1993 and 2011 were found to have been illegally awarded to companies. However, only 30 of the blocks are currently operational. The only silver lining is that companies are allowed to keep mining at the properties until March 31, 2015.
India is the third-largest producer of coal, behind China and the US. That said, the country also suffers from a domestic coal shortage, so some are concerned that the shutdown of several companies' coal licences could cripple the Indian economy.
The fallout from this decision could also raise prices set by companies. Livemint reports that if a company no longer owns the mining site it was working on, it will charge more money for its coal to help offset the loss.
Those costs could possibly be felt across the board, reads a report authored by India Ratings. The firm predicts both a rise in coal prices and a subsequent increase in fuel costs as the economy reacts to the court decision.
India Ratings also discusses Coal India's (BSE:533278) falling production targets, which could also give a boost to coal prices.
Prices could continue to drop
Despite those predictions, since the news, thermal coal CAPP has dropped about 2 percent, leading some analysts to say the news out of India will do little to affect the price of coal.
"Coal India's price will naturally remain a benchmark and nobody can afford to sell it at higher than that price. Rather prices will tend to come down," Partha Bhattacharya, a former chairman of Coal India, said in an interview with CNBC.
But with India in desperate need of coal to keep electricity flowing throughout the country, the court decision could help some coal markets.
On that note, Joe Aldina, an analyst with Wood Mackenzie, said the news could be a boost for alternative thermal coal markets.
"This is a positive catalyst for the seaborne thermal coal markets. Full substitution by imported coal isn't feasible because Indian boilers have been designed to take domestic high-ash coals and some coal-fired plants aren't located favorably for coal delivered via the coasts," he said.
Even so, Aldina warned that Colombia has kept the global seaborne thermal coal market well supplied, which could negate any effect by the news out of India.
What happens to the companies?
The licences of companies such as Jindal Steel & Power (NSE:JINDALSTEL) and Hindalco Industries (NSE:HINDALCO) were cancelled by India's top court on Wednesday, reports Bloomberg, and their share prices tumbled as a result. Jindal saw its share price fall about 10 percent in one day, with Hindalco's falling 5 percent. Both companies will also have to pay fines based on the amount of ore they produced during the time they owned the mines in question.
Companies that lost permits will have to either try to regain them through auction or buy replacement supplies from the market to help offset the loss.
Securities Disclosure: I, Nick Wells, hold no direct investment interest in any company mentioned in this article.
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