Moneycontrol Pro Panorama | When the State is a stakeholder, it’s complicated

Dear Reader,

Peabody Energy, the world’s largest private sector coal producer, reported a profit of $513 million in the December quarter, compared to a loss of $129 million a year ago, its highest since 1999, according to an FT report. Its outperformance was led by higher demand but chiefly by a sharp increase in coal prices, both of the kind used to generate thermal power and the type used in production of goods such as steel. There are no signs of the increase in coal prices easing any time soon, meaning the good times are expected to continue.

Back home, state-owned Coal India too posted a 32 percent increase in its EBITDA over a year ago, with revenues rising by 20 percent on the back of a 13 percent increase in volumes. That’s not all that great a price-led increase, although these numbers are not too bad either. Constraints in hiking coal prices hold back an increase in its margins despite a windfall increase in global coal prices. The impact of coal price hikes on power costs and the political fallout of that are a dampener. On the other hand, costs keep increasing due to various reasons, such as wage hikes. Even now, a price increase for the fuel supply agreement that was to take place in the September quarter has not been given effect to. That’s why my colleague Nandish Shah believes that higher dividend yield is Coal India’s only draw.

While the government is trying to get out of business as much as it can, its production-linked incentive schemes mean it still has one foot in the door, maybe for decades to come. That these schemes depend on the commercial success of these projects is a main risk not just for the government but for companies as well. Consider today’s chart of the day done by R Sree Ram on China’s ramp-up of solar and wind energy components. It is on the road to building massive excess capacity, with wind turbine capacity set to increase by 42 percent and battery manufacturing capacity to rise by 150 percent in the next two years. This is what India’s investments in this sector, with the government setting aside Rs 19,500 crore for a PLI scheme, are going to be up against.

Reducing dependence on China is a goal for governments such as India, but one that remains elusive. Consider what Abhijit Dutta wrote in his column on trade, arguing that India’s talk about lowering imports from China is not being matched by ground reality. In 2021, it is estimated that India’s trade deficit with the country rose by a whopping 58 percent. Our main imports include goods from across sectors such as electronics and chemicals and there’s no easy way to switch to domestic sources.

It’s one thing for the government to lay out economic policies but when it comes down to implementation, risks such as conflicting political priorities and external events come into play. A glaring example is oil refiners being hung out to dry. They are free to hike retail prices on paper after decontrol but are refraining from doing so despite soaring crude prices. State elections are probably the reason why. Investors, of course, are a hardy lot, taking these risks in their stride and merely factoring them in stock and even country valuations.

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Ravi Ananthanarayanan

Moneycontrol Pro