Australian carbon tax law turns heat on Indian steel firms – Report

In what spells tough times for Indian power and steel companies using Australian coal, the lower house of that country’s Parliament has passed a politically contentious Bill to impose carbon tax on polluting industries.

The bill, which proposes a carbon tax of AUD 23 a tonne, is expected to be tabled before the Senate by mid November 2011. The proceeds will be used to fund clean energy. If the bill becomes law, it will lead to an increase of 55 paise a unit in tariff for power plants using Australian coal.

Adani Power, Lanco Power and GVK Power are among Indian power companies planning to use coal from acquired assets in Australia to fire their projects. They have bagged these projects through tariff bidding route where the risk of an increase in fuel price is borne entirely by developers.

Coking coal accounts for about 30% of steel cost. Most Indian steel manufacturing companies import coking coal from Australia. For example, while SAIL meets 70% of its coking coal requirement from imports, JSW Steel’s dependence is 100%.

The companies put up aggressive bids to secure these projects based on the assessment that they will be able to control cost of coal from acquired mines. However, their fuel cost calculations have gone awry, with key coal exporting countries changing coal pricing laws and taxation policy anticipating a sharp rise in India’s coal demand in coming years.

Mr Dilip Kumar Jena, senior consultant and knowledge manager at PwC, said that “The carbon tax will increase the cost of coal produced from underground gassy mines and mines with relatively higher cost structures. This will result in higher landed cost of coal at steel and power plants based on imported coal.”

Mr Jena said that “The carbon tax will also increase the production cost of steel companies, which would have a cascading effect on the economy. While steel companies are free to revise product prices to pass on the increase in input costs, they might lose their competitive edge.”

Power projects with 14,000 MW under development based on imported coal are facing possible default on supply contracts, according to the Association of Power Producers, a representative body of private developers.

Indonesia, another key coal exporter, recently changed its coal pricing methodology to link it with international indices. As a result, the price of Indonesian coal will go up by USD 30 a tonne and lead to a 70 paise per unit increase in the cost of electricity.

The Centre has washed its hands of the issue, saying the matter should be settled between developers and electricity-buying states. On the other hand, states like Gujarat, where assembly elections are due next year, are reluctant to take a call for fear of political backlash.