Private power companies in India are going to be hit by increases in the price of coal that they import from Indonesia. They thought they had a strategy to deal with this but they have got it wrong.
The price of Indonesian coal is going up because the government is imposing a new price formula on the coal producers. The royalties paid to the Indonesian government will be linked to international coal prices. This will raise prices by $30 per tonne.
The India power companies have major power plant projects that rely on imported Indonesian coal. They are tied into agreements that do not allow them flexibility for this kind of political event, so they are now potentially looking at big losses.
What is interesting is that some of the Indian power companies thought they had hedged the risk of increasing prices by buying equity in some of the major Indonesian mining companies.
What looked like a good strategy to deal with increasing coal prices has turned out to be worthless because of political changes.
Today’s takeaway: International strategies have to consider political impacts on tax and pricing.
Here are a couple of links to more detail on this story