PM Modi’s decision to demonetize India may have benefits in the long run. However, the situation is grim at present. Indian coal industry, where a great share of transaction is cash based, is affected in a big way. From slowed purchases to deferred payments, problems in procurement and transport, the coal industry is struggling to stay afoot.
Steel 360 gathered opinions from experts on various facets of impact of demonetization on the industry. Following are the excerpts.
Q. What is the impact of demonetization on coal business? How has it affected demand, supply and price in the Indian (imported coal) market?
A. 1 PRG: The entire market has slowed down due to demonetization. Lot of small size steel plants in Gujarat and tile making plants in Morbi have shut down and this has affected coal trade deeply. There is no demand for coal in the market owing to a major cash crunch and the companies that want to procure coal don’t have the working capital to do so. In the past month, international coal prices have fallen by nearly 25% and will fall further.
DP: Demonetization has mainly affected the retail business in coal sector. Major portion of the coal trade and purchases by the retail & small end users happen in cash. That has come to a standstill. This has created vacuum in coal off-take. In spite of the existing demand, because of very low cash in the system, trade is close to zero. With drop in off-take, there is naturally severe pressure on coal offers that have dropped in both domestic and global markets. And due to this fall in prices, customers are wary of purchasing any additional quantities anticipating further drop.
While on the other hand, traders and coal suppliers are unable to project the price trend that will follow and hence are unable to take any positions, long or short, leading to very less fixtures.
PG: Demonetization has slowed down movement of coal at various ports as large portion of transactions especially by small buyers happen in cash. It’s also the means to pay for transportation of the material. Stock and sell players have also been adversely affected. It is hoped that the situation will slowly normalize once new currency notes are available in abundance. Some of the buyers and sellers are shifting to new payment methods, but adaption to this mode will take time. However, there is no effect on corporate buyers as most of them were already purchasing through RTGS and LC based payments.
Q. Please highlight few major troubles being faced by buyers and sellers in India after demonetization.
A. PRG: The working of many small size plants is greatly affected due to demonetization.
DP: Some of the major troubles being faced by buyers and sellers are lack of cash to purchase or trade, slowdown in the trade volumes, severe effect on cash flows and hence working capital pressure, voluntary production cuts by the manufacturers on account of dipped sales. It’s a cascading effect where with the last end of the supply chain coming to a standstill, the entire manufacturing and trading circle has slowed down drastically. Customers are deferring their purchases and sellers are left with huge volumes of coal inventory at their end due to slowed down lifting and evacuation. Only major industrial players in the cement, iron & steel and power are able to survive, that too with great difficulty, since most of their requirements are fulfilled by imports and their transactions are through mainstream banking. However, they are also equally hit due to the sudden drop in their sales turnovers.
Also the banking sector is struggling in order to cope up with this massive influx of the unorganized trade coming into mainstream banking. The banking sector will have to create a massive infrastructure to incorporate all the unorganized unaccounted trade to flow through the mainstream channel. This is a phenomenon wherein all the major industry segments, stand-alone businesses and the banking sector are trying to align and connect with each other into a major harmony, which in itself is a major task and will take time.
PG: Major trouble has been the sudden loss in sale as most cash buyers are out of the market due to non-availability of adequate cash. This problem is across sectors where cash was a major form of payment.
Q. What is expected in Q4 FY17 on the grounds of demonetization? When will the market normalize?
A. PRG: Q4 will be very damp/slow. It will take 6 months for the situation to regain normalcy. DP: As per my estimate, we will witness very slow business in Q4 FY17 since it will take a lot of time for the entire system to adjust itself to the change in the transaction pattern from traditional cash based to the new cashless mainstream banking. With the resistance initially, we will be able to see signs of revival by the end of Q4 FY17. It will take time till at least the mid of Q1 FY18 for the businesses to come back to normalcy. And the market to come back to full swing, I estimate it to happen by Q2 FY18.
PG: Markets should start to normalize by the end of Q1 in FY18. By that time, hopefully enough cash would be available and the government would withdraw limit on cash from bank accounts.
Q. How is the current Indian coal market running after 1 month of demonetization? What is the impact on coal stock and sale business in India?
A. PRG: Stocks at ports have gone up and prices have declined. There is very low demand and sale is suffering. Coal India has fixed prices so it has remained the same.
DP: The current Indian coal market is still under pressure due to non- availability of cash. Although demand exists, buying is minimal and that too mainly in the retail sector. The market is still settling in to this sudden surprise of cashless transactions. Most of the customers and sellers are still trying to reconcile to the new system and bring their cash into the mainstream banking. This has brought sales and purchases to an all-time low. With customers deferring their new purchases and evacuation at ports happening at a very low pace due to lesser availability of transport in the absence of cash, sellers/traders are witnessing higher inventories at ports or at their warehouses. With the inventories liquidating slowly, the stock and sale business will move at a very slow pace. The stock and sale business will witness minimal buying and trading till end of Jan or mid Feb until the beginning of the new season. Most of the small customers have suffered heavy losses due to sudden wipe out of unaccounted cash from the system. For them to realign to the new system and recover from their situation will take at least 2-3 months.
PG: Sales are slow. Problems of cash availability are persisting. Stock and sale business is suffering the most due to demonetization.
Q. Is there any impact of demonetization witnessed in the domestic (CIL) trade and auctions?
A. PRG: Until November 1st week, as international coal markets were on fire due to demand from China, there was interest in CIL auctions. But now since China is not buying much coal and demonetization has hit India, coal prices have fallen by 25%.
DP: In my opinion, there will of course be a major impact on the domestic trade and auctions of CIL too since all the customers of CIL are hit by the effects of demonetization for various reasons as explained above.
PG: Domestic coal business hasn’t been greatly affected, except that part which was based on cash sales for stolen coal and also sale of coal rejects by washeries. Some impact is there on coal movement as transport companies which were using cash for freight and other payments are experiencing trouble in arranging for the required cash. Hopefully, this situation would normalize in another 6-8 weeks.
Source: Steel 360 Magazine Jan’17 Issue