ESCORTS MUTUAL FUND

Mutual funds are often labeled as safer investment avenues. This is because they are professionallymanaged by experts. But does that mean investing in mutual funds is risk-free ? Absolutely not. Let's understand the various risk factors associated with it and ways of minimising risk.

Under-performance of fund
Investors usually expect their picks to perform at least on par with the benchmark , if not surpass it. However, in many instances, funds have under-performed , belying investor expectations. This is because all the funds cannot succeed in beating the benchmark index. Hence, the possibility of under-performance is real.

Market risks
Mutual fund investments are subject to market risks and there is no assurance or guarantee that the fund's objective will be achieved. The possibility of an overall decline in stock, fund or bond fund prices over a short term or even extended periods is the associated market risk.

Stock markets tend to move in cycles, alternating between periods when prices soar up and other periods when prices fall. Past performance does not guarantee the future performance of the schemes of the mutual fund.

Over-diversification
Over-diversification can occur when two or more investments over-lap . A well-diversified portfolio includes asset classes that are not highly correlated and are thus considered to be complementary.

By spreading your investments across various sectors that have low correlation to each other, the price volatility is greatly reduced. This is because not all industries/sectors move up and down at the same time. Over-diversification or indiscriminately spreading your exposure will not be of much help.

Costs
Even if a fund fails to deliver, the investor has to cough up fees and other expenses. Mutual fund investors have to shell out entry load/exit load and numerous other charges that come packaged in. The fee was used by the fund houses to meet their marketing , distribution, processing , asset management expenses and other administrative overheads. Investors have news to rejoice. SEBI has announced that starting August 1, 2009, there would be absolutely no entry load on any mutual fund purchases .

in the past six months to September, but the real test of their glitter may come during a slide, going by the past history.

Though net asset values of many of these funds have vaulted since April, investors must take into account the volatility quotient of many of these schemes.

While it is the midcap funds that have obviously gained the most in the current rally, it will be foolish for investors to be guided by these returns without analysing the past performance of these funds.

For, even though most of the funds now boast of double to triple digit returns for the past six months, the key driver could well be the momentum in the market rather than fund managers’ design.

The top 10 performers in the current market upturn, when plotted on a graph for their returns since 2006, conform to a deep V-shape grid, indicating extreme volatility. In fact, some of these schemes, which have gained immensely in the past six months, were not only bruised during the 2008 meltdown, but their performances during the peak of the historic bull rally in 2006-07 was average.

Schemes, such as JM Emerging Leaders, Canara Robeco Emerging Equities and DBS Chola Midcap, among others, have undoubtedly done extremely well in the current calendar year, each posting absolute returns of over 115% in the past six months alone. Having said that, the fact remains that there is nothing that stands out about their performances going by past records.

Then there are schemes that have not delivered high returns recently, but have been consistent performers over a period of time. Birla Sun Life Frontline Equity, Sundaram BNP Paribas Taxsaver, DWS Investment opportunities and Reliance Growth are some of them.

While their absolute returns in the past six month range between 60% and 90%, lower than the over 115% returns of some of their peers, these schemes succeeded in not only generating handsome returns in 2006-07, but also succeeded in limiting losses during a slide in 2008.

So what should an investor look out for? Periodic bouts of block-buster performances or a fair deal of consistency that ensures decent returns in upswings and provide relative cushion during the downslide? While those using MFs more as a trading platform may opt for the former, for others who have faith in the concept of long-term investing, it pays to plump for consistency.

Invest in MIPs for 3-4 years

My broker has advised me to invest a lumpsum amount in a Monthly Income Plan (MIP). In the current scenario where interest rates are expected to rise, should I do so? Also, should I invest in more than one MIP for diversification?
-Ajay
MIPs are conservatively positioned funds. They should not be misunderstood as plans giving monthly income. They typically invest 80-90 per cent of their assets in fixed income and the rest in equities.
Investing a lumpsum in MIPs is not a bad idea. Due to their small exposure to equities, this will not amount to a huge risk. The rising interest rates are expected to have a negative impact on fixed income instruments' pricing. But if the equities gain, they can offset these losses.
You should be prepared for intermittent declines. However, over three to four years, their returns can beat inflation, and with a relatively stable performance. You may pick from the following funds: DBS Chola MIP, Reliance MIP, UTI Monthly Income Scheme, HDFC MIP Long-term. Diversification is important here as well. Spread your investment across two to three funds.
Should I redeem my investments from Religare AGILE Fund, where I had invested during the New Fund Offer (NFO)? What should I opt for between the growth or dividend option under equity schemes?
-Anand Kodiyal
Religare AGILE invests in stocks of companies selected on the basis of a mathematical model. It follows a passive approach to investing. It has not yet proved its investing style.
You may consider moving to other proven large-cap funds such as DSPBR Equity, HDFC Top 200, DWS Alpha Equity, Fidelity Equity, HDFC Growth and ICICI Prudential Dynamic.
Coming to choosing the right option, in mutual funds, dividends are a part of the total investment that is distributed to the unit holders. This distribution is then deducted from the NAV of the units and is completely tax-free. In the dividend reinvestment option, these dividends are again invested in the fund at the new NAV, instead of paying off in cash.
Regardless of the option chosen, a fund's returns remain the same. However, differences are evident when taxation is taken into consideration. In case of redemptions within a year (short-term), dividend declarations which are tax free will reduce the capital gains on the original units purchased. Hence, the post-tax returns under the dividend option will be better than the growth option in the short-term. But after a year (long-term), when the gains from original units will also be tax-free, this difference will disappear.
Since equities are for the long term, mid-term withdrawals or dividend payouts are not suggested. The present tax laws make the dividend reinvestment option more favourable. But at the time of withdrawal, if dividends have been declared within the preceding one year, the gains on new units will be subject to short-term capital gains, even if the original investment has already completed one year and has become tax free.
Value Research

http://www.business-standard.com/india/news/invest-in-mips-for-3-4-years/371362/

INSURANCE

Third-party policy sale floor likely for auto insurers

MUMBAI: Insurance companies may soon have to mandatorily sell a minimum number of motor third-party liability policies. This follows proposed  amendments to the Insurance Act 1938 which aims to ensure that insurers do not shun proposals for the mandatory yet unprofitable third-party cover.

This amendment is a part of the omnibus insurance legislation that seeks to amend existing laws. The most-publicised portion of this amendment is the part which seeks to increase foreign direct investment

in insurance from 26% to 49%. The insurance bill wants to make motor third party insurance more accessible to buyers as this is a statutory cover . Under the Motor Vehicle Act every automobile owner has to purchase an insurance cover which will meet the liability arising out of claims from third-party accident victims.

Insurance companies are unsure of what the impact of the amendment will be. At present insurance companies are required to generate up to 7% of their total premium from the rural business. There are provisions of penalties if they do not achieve this level of business. However, there is no quota on the basis of products. It is expected that the regulator will fix an obligation based on the level of business done by an insurance company in the immediate preceeding year after the amendments take place.

The third-party insurance portfolio, which provides compensation to victims of road accidents, generally does not make profit as total compensations awarded by the motor accident claims tribunal are more than the premium collected. The losses are largely because of claims by commercial vehicle accident victims. To ensure that no single company becomes the victim of adverse selection, insurance companies have agreed to pool together their premium and claims from third party insurance and share the losses.

The amendment to the Act will replace the motor pool arrangement, which is limited to only commercial vehicles and replace it with a quota system for all vehicles. Some insurers fear that such a system would perpetuate cherry picking as all companies would try to fulfill their targets by writing profitable third-party insurance for private cars.

Insurers are reluctant to comment on the impact of the legislation until they discuss the proposals at an industry level . Others feel that a quota is not the answer since third-party is a mandated cover. They add that the only way out is to allow insurers to charge prices that will offset losses completely. The regulator controls the rates on third-party insurance as this is a sensitive subject which will add to the cost of transportation across the country. Also the truckers have a strong lobby which has strongly resisted price hikes.

Bancassurance lacks lustre; premium renewals dip 40%

The reason behind the trend is the predominance of unit-linked plans in products sales by banks in addition to the general caution being exercised by many in taking new policies due to slowdown fears.
G Naga Sridhar
Hyderabad, Sept. 25 The sale of insurance through bancassurance channel appears to be facing a tough time, thanks to economic slowdown.
“According to preliminary reports, the persistency ratio of bancassurance channel has dipped to as low as 40 per cent in some banks, meaning that in respect of the majority of policies sold, the bank customers have chosen not to pay renewal premiums,” Mr R. Krishnamurthy, Managing Director (Insurance and Financial Services), Wattson and Wyatt Worldwide, told Business Line.
Unit-linked plans
According to experts, the reason behind the trend is the predominance of unit-linked plans in products sales by banks in addition to the general caution being exercised by many in taking new policies due to slowdown fears.
“While the activity has picked up some momentum in the recent weeks, bank customers are still seen to be cautious in entertaining high ticket unit-linked schemes,” Mr Krishnamurthy added.
“Apparently, things are not moving well in bancassurance,” agrees Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank. Till recently bancassurance contributed a major chunk of fee-based income by the bank barring the first quarter of current fiscal.
“Bancassurance is a major area for LIC. Though there appears to be some concerns, we should be doing well. But private insurers may have serious problem,” said a senior official of LIC.
“The economic slowdown has impacted businesses across the globe and Aviva is no different. However, we are confident that India’s long-term story remains intact with insurance penetration levels at only 4 per cent of GDP,” Mr Rishi Piparaiya, Director Bancassurance, Aviva India, said.
Bancassurance was an integral part of Aviva India’s business and it contributes to more than 50 per cent of its total business, he added.
Before slowdown, bancassurance had seen robust growth. In 2007-08, it grew over 60 per cent in LIC and over 100 per cent in SBI Life compared with previous year.
According to Watson Wyatt, bancassurance (product sales by banks as well as referrals generated by bank branches) along with sales by other corporate agents had contributed about 27 per cent of the total premiums for the year ended March 31, 2008.
The latest data is not available.
‘Vibrant channel’
However, experts feel that bancassurance is here to stay. “Going forward, it will be a vibrant channel. If banks are allowed to sell products of more than one company as is happening abroad, it will be good for industry,” Mr Rajiv Jamkhedkar, Chief Executive Officer, Aegon Religare Life Insurance, said.
http://www.thehindubusinessline.com/2009/09/26/stories/2009092651180600.htm

BANK

ICICI to block all cards in case of default on one

Citi, StanChart already follow this practice, SBI Cards differs.
Adopting a practice that many considered standard in the credit card industry, ICICI Bank will block all its credit cards issued to a customer in case s/he defaults on any one of them.
The bank, which is the country’s largest private sector lender with the largest credit card base, has already informed its customers about the move which will come into effect from October 5.
According to the new terms and conditions, if a customer holds two or more cards and defaults on payment in one of the card accounts, “ICICI Bank is authorised to block the credit limit as made available to the card member under all other ICICI Bank’s card accounts as well as withdraw such privileges/ benefits as made available under all such card accounts, till such time the defaulting card account is regularised by the card member.”
“The card member also agrees and acknowledges that ICICI Bank shall not be required to provide any additional notice for the above,” as per the revised terms. This attempt is the latest by the bank to reduce losses on its credit card portfolio. The bank has already brought down its credit card base to 6 million from a peak of about 9 million.
However, players such as Standard Chartered Bank and Citibank have been following this practice for a long time. “This is the standard operating procedure for us. If a customer defaults on one line of credit, it is obvious that the lender will try to mitigate the risk on other lines of credit,” a senior executive from Standard Chartered Bank said. “This is a justified move on our part and a lot of players already follow this policy,” said a senior ICICI Bank executive.
Asked why his bank had not adopted this strategy earlier, he said, “We have been dealing with our delinquencies in different ways. We wanted to make our policy clear to customers, which is why we informed them.” SBI Cards, which has the third-largest credit card base in the country, does not follow this policy, according to a senior executive.

http://www.business-standard.com/india/news/icici-to-block-all-cards-in-casedefaultone/371558/

Focus more on Casa deposits, govt tells public sector banks

The government has asked public sector banks (PSBs) to increase focus on attracting low-cost current account, savings account (Casa) deposits in order to contain their cost of funds. It will also enable them to maintain a softer interest rate regime.
The government has asked for specific Casa targets from public sector players, which have been provided by the banks as part of the discussion on statement of intent setting the targets for the current financial year. Bankers said that most public sector players had indicated a Casa growth of 17-20 per cent for the current financial year.
While the banks earlier focused on deposit growth, Casa deposits are coming into prominence for the first time. The move comes amid expectations of hardening of interest rates.
“The government wants banks to increase their Casa deposits. These low-cost deposits will help us to contain costs, which means that a softer interest rate regime can be maintained,” a banker said.
Over the last three years, the share of low-cost deposits for public sector banks has dropped from 39.95 per cent at the end of March 2006 to 32.66 per cent at the end of March 2009.
This year, Corporation Bank and Allahabad Bank have projected a 17-18 per cent growth in low-cost deposits. For Corporation Bank, the share of Casa in total deposits fell to 23.84 per cent in June as against 31.44 per cent at the end of March. The bank expected to close the current financial year with Casa deposits of 25 per cent.
Allahabad Bank’s low-cost deposit share was at 34 per cent and the bank would be looking to maintain the share, a bank executive said.
Punjab and Sind Bank is targeting a 20 per cent Casa growth in 2009-10. It would enable the bank to have a 30 per cent share of low-cost deposits in its total deposits. The Delhi-based bank’s Casa share was 27.7 per cent at the end of March 2009.
Even banks such as State Bank of India have witnessed a fall in the share of Casa to total deposits and have initiated steps to increase it. In case of SBI, the share of Casa in total deposits fell to 38.45 at the end of June this year as against 39.26 per cent in March due to a decline in current account balances. An increase in low-cost deposits would also help banks to improve their net interest margins (NIMs) which came under severe pressure in the first quarter. Repeated cuts in the benchmark prime lending rates since October-November last year also brought pressure on it.

http://www.business-standard.com/india/news/focus-morecasa-deposits-govt-tells-public-sector-banks/371560/

Banks put Rs 10,500 cr in tank for growth journey

With the demand for credit expected to shoot up, private banks are bolstering core capital. Seven of them are in the process of raising a cumulative Rs 10,500 crore in equity to fund expansion, which, in some cases like Axis Bank’s, includes entry into mutual fund, private equity and wealth management businesses.
Although credit growth has fallen to 13.24 per cent in the 12 months to September 11, bankers expect it to pick up in the second half of this financial year. Bank chiefs recently told the Reserve Bank of India that by the end of March, the growth could rise to 20 per cent over last year.

While the bank has comfortable overall capital adequacy, the banker said the Axis management was keen that the bank’s Tier-I capital adequacy ratio should not dip below 9 per cent. RBI mandates 9 per cent as the minimum CAR, with a minimum Tier-I capital ratio of 6 per cent.
Like Axis Bank, HDFC Bank, which expects to grow its loan book at over 20 per cent during the current financial year, is well capitalised. The country’s second largest private lender is expected to boost capital when its promoter, Housing Development and Finance Corporation, converts the warrants issued to it last year into shares.
“We decided to subscribe to these warrants to maintain our ownership level in HDFC Bank at or around 23 per cent and offset possible dilution after the merger with CBoP (Centurion Bank of Punjab),” said an HDFC executive.
Others are tapping the market, now that the sentiment towards the the financial sector has improved. “Banks had not gone to the equity markets for the last 2-3 years," said IndusInd Bank Chief Executive Officer Romesh Sobti. He expects the bank to grow at 25 per cent a year.
ING Vysya Bank, which recently raised Rs 415 crore through a preferential issue and Qualified Institutional Placement, plans to focus on retail loans. “The idea is to have building blocks ready to accelerate our growth plan for our retail portfolio, including loans to small and medium enterprises,” a spokesperson for the bank said. The bank, which is very active in southern India, has embarked on a plan to increase its national footprint. It opened 56 branches last year and intends to add another 60 this year.
Loss-making Development Credit Bank (DCB) has taken shareholder approval to raise Rs 100 crore through the QIP route and another Rs 200 crore from a rights issue. “Although our loan book is growing at a slow pace, we are planning to double our asset book over the next three years,” said DCB Managing Director and CEO Murali Natarajan.
“Credit growth has to pick up sooner or later. We want to be prepared for it,” said Rajat Monga, group president- financial markets and chief financial officer of YES Bank. The bank intends to raise Rs 720 crore through a QIP issue this financial year.
There are expectations of a rise in bad debts in the coming months, which would require more provisioning. Analysts however said delinquency levels would fall and credit demand rise with the improvement in the economy.

At present, South Indian banks attract a major part of such money from West Asia.

Even though inward remittances continue to surge, banks are chasing foreign currency non-resident (FCNR) and non-resident external (NRE) term deposits, a source of low-cost funds.
Banks, which do not have significant non-resident Indian (NRI) deposit portfolio, are now on a run to develop one in order to make the most of the surge in inward remittances in the aftermath of the global financial crisis.
However, banks are increasingly finding it difficult to retain NRE and FCNR term deposits as most of them are getting diverted to high-cost non-resident ordinary (NRO) term deposits, although interest earned on these deposits is subject to tax deduction at source (TDS), exchange rate risk and cannot be generally repatriated.
Since April, when inward remittances were at their peak levels, there had been about 15 per cent shift from FCNR and NRE to NRO term deposit accounts, said bankers.
Net inflows through various NRI deposits increased from $179 million in 2007-08 to $3.99 billion in 2008-09, according to the RBI data.
Since October last year, inward remittances had started increasing due to such factors as the global financial crisis, a comfortable exchange rate and higher interest rates. There was around 50 per cent rise in remittances in the second half over the first half of the year, said Abraham Thariyan, executive director of Thrissur-based South Indian Bank (SIB).
“Now, we are in a peculiar situation, where the increase in fresh remittances has stagnated, but is still 50 per cent higher than usual... Because of the higher rate of interest on NRO term deposits, NRE and FCNR deposits are not picking up well,” said Thariyan.
Interest rates on NRE and FCNR deposits cannot be changed by banks and are based on the London Interbank Offered Rate (Libor), but the balances held in such accounts can be repatriated abroad freely and they also enjoy tax exemptions.
On the other hand, the interest rate on NRO accounts, is almost at the same level as that on domestic term deposits. Also, NRO account-holders, though subject to TDS, can avail tax concessions under the double taxation avoidance agreement that India has entered into with a host of countries.
Thus servicing NRO term deposits is also not as attractive for banks as other NRI deposits, which has interest rate of close to 3 per cent. “We have seen about 15 per cent shift to NRO deposits since April,” said TM Bhasin, executive director, United Bank of India.
To stop the drift, several banks have renewed marketing activities abroad, particularly in line with expected increase in remittances during the festival season.
“The growth in NRE deposits has not been satisfactory. In case of NRO term deposits, the future cost is higher. We have put specific marketing guidelines for NRE deposits,” said MG Sanghvi, executive director, Bank of Maharashtra.
At present, south-based banks garner a large chunk of NRI deposits mostly through remittances from the Gulf countries.
“At present, we do not have a substantial NRI deposit portfolio, but we are trying to develop one. I have instructed our marketing division to engage people in NRI pockets in India and abroad in this regard,” said Allahabad Bank CMD KR Kamath.
UCO Bank is also planning a special campaign abroad to attract NRI deposits.
“Unfortunately our geographical presence is not much in countries from where NRI deposits come, so the chances of mobilising NRI deposits is less. We are trying to create a database of customers in countries where remittances come from. We have started sending them mails and entice them to send us money,” said SA Bhat, chairman and managing director of Indian Overseas Bank.
Mangalore-based Corporation Bank is also planning tie-ups with about six-seven exchange companies to attract NRI

http://www.business-standard.com/india/news/banks-eye-low-cost-nri-deposits/371392/

SEBI

Sebi may segregate retail, institutional MF schemes

In a bid to protect the interests of retail investors, the Securities and Exchange Board of India (Sebi) is planning a clear segregation of retail and institutional schemes. Sources said Sebi might ask fund houses to create separate portfolios and net asset values (NAVs) for retail and institutional schemes.
Sebi is working on the move as during the liquidity crunch of October 2008, fund managers sold the most liquid stocks in their portfolio to meet redemption pressures, leaving retail investors in a spot.
At present, although mutual funds offer both retail and institutional plans, these are separate only in the name as their portfolio and NAVs are the same. The only difference is the expense ratio, which is more for retail investors. Sources said Sebi was looking at doing away with this disparity as well.
Vineet Arora, head of products & distribution at ICICI Securities, said, “It is a welcome move. There is an obvious difference in behaviour between retail and institutional investors. Institutions tend to panic more than retail investors. Since redemption pressures are more from institutions, schemes for them will have to keep more cash, which may impact returns.”
Mutual funds charge 2-2.5 per cent from retail investors in equity schemes. The fee for institutional investors is only 0.5 per cent. The expense ratio is the percentage of a mutual fund’s net assets/corpus that goes towards meeting its expenses. The ratio covers fund management fees, marketing and selling expenses, and registrar fees. Funds with lower expenses give better returns, which is one reason why institutional schemes post better returns than retail ones. A case in point is ICICI Prudential’s Focussed Equity Fund institutional plan, which has posted 19.64 per cent returns compared with the retail plan’s figure of 18.49 per cent. There are several schemes where such a disparity exists.
Deepak Sharma, CEO, Sarthi Wealth Management Consultants, said, “The segregation is necessary after the kind of outflows witnessed in October 2008. It will ensure that retail investors are not at a disdvantage during large-scale redemptions.”
Recently, Sebi Chairman CB Bhave had expressed concern over the mutual fund industry’s over-dependence on funds from corporate houses. The Reserve Bank of India has also picked holes in the business model adopted by mutual funds. “A high dependence on corporates for funds implies a lesser role for the retail investors,” it said in its Annual Report 2008-09.
According to a Celent report, institutional investors contribute 56 per cent of the industry’s assets while retail investors account for only 37 per cent. By comparison, retail contribution in China is 70 per cent.
http://www.business-standard.com/india/news/sebi-may-segregate-retail-institutional-mf-schemes/371171/

RBI, Sebi to regulate NCDs jointly

Debenture trustees may have to report company filings to the market regulator.
Non-convertible debentures (NCDs) of less than one-year maturity will now be regulated jointly by financial and market regulators. The decision was taken at a meeting between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) earlier this week.
At the meeting, the two regulators agreed that NCDs needed to be regulated following huge investments by mutual funds in fixed income plans and banks as it posed a systemic risk in case there was any problem in redemption of these instruments.
Following this decision, debenture trustees to such instruments may be asked to report the filings by companies or non-banking finance companies (NBFCs) to Sebi which, in turn, will send them to RBI.
Before floating NCDs, every company appoints a debenture trustee, which is usually a bank or a broking firm, that acts as a custodian of the debentures.
NCDs are debt instruments floated by companies, NBFCs and banks to raise short-term finance from the market, mostly for working capital purposes. These are subscribed to in a major way by mutual funds for their short-term fixed-income portfolios, and other banks. However, NCDs are neither listed, nor reported to any regulator and thus are totally unregulated as of now.
According to sources, these instruments are privately-placed with institutional investors such as mutual funds and banks. Therefore, any data on the total mount outstanding in NCDs at a given point of time are difficult to get.
Data on NCDs are required to avoid last October-like situations that compelled RBI to provide liquidity support to both banks and mutual funds. Back then the mutual funds faced the redemption pressure, and companies rolled over the maturity of NCDs to avoid default as they found it difficult to pay the money back to debenture holders.

On the other hand, the money borrowed through NCDs belongs to the mutual funds or banks that raise it from the public. Thus, any default in such instruments has a major systemic risk.
In October 2008, liquidity support worth Rs 20,000 crore was given to the mutual funds to manage redemption pressure following defaults and eventual rollback of NCDs. Even the banks were allowed to lend against and on buyback of certificates of deposit (CDs) held by mutual funds to tide over the redemption pressure
http://www.business-standard.com/india/news/rbi-sebi-to-regulate-ncds-jointly/371170/

ECONOMY

Coking coal prices may touch $200/tn in 2010-11
Driven by surge in imports of coking coal by China, growth in Japanese steel output and signs of recovery in the Indian economy, spot prices of the raw material are expected to firm up in the international market.
Global prices of coking coal, which are currently hovering around $160-170 a tonne, are expected to harden further and reach $200 a tonne in 2010-11, says a report by Citi Investment Research and Analysis, a division of Citigroup Global Markets Inc.
The report has projected the price of the semi-soft variety of coking coal at $120 a tonne, up from the existing price of around $100 a tonne.
The sea-borne coking coal prices have sharply moved from $130 a tonne to $160-170 a tonne in the past three-four months as Chinese imports of the raw material have increased exponentially this year.
Coking coal imports by China are projected at 25.5 million tonnes this year, a 269.56 per cent jump over 2008. The surge is attributed to a dip in the country’s domestic production as it plans to close more than 4,000 small coal mines by 2010 to improve safety and drive consolidation in the coal sector.
“The spot prices of coking coal in Australia have touched $170 a tonne and this upward movement in prices is mainly due to an unexpected growth in imports by China. In fact, imports by the country in the past six months is comparable to what it usually imports in a period of 18 months”, said Ganesan Natarajan, president and chief executive officer, Ennore Coke.
Ennore Coke, a domestic manufacturer of metallurgical coke, which uses imported coking coal as the raw material, had settled its contracts for 2009-10 at around $130 a tonne with the international suppliers. However, Natarajan ruled out any further hardening of prices and said that premium hard coking coal rates in 2010-11 are expected to remain at the current level of $170 a tonne.
Dipesh Dipu, principal consultant, Pricewaterhouse Coopers said, “The coking coal prices in the short run, particularly in the second half of the year, may depend on the impact of Chinese order for the smaller mines to merge with the larger ones. The prices in 2011 are also expected to be in line with the prevailing prices or may be a few dollars higher than those of 2010.”
He indicated that the increase in global coking coal prices was set to impact the operations of the domestic steel makers who heavily depend on imports for their requirements.
Higher coking coal prices would mean greater contract prices for the domestic steel makers and this is bound to impact their margins, concurred Shashi Kumar, advisor (coal), NTPC and former chairman, Coal India Ltd (CIL).
Apart from coking coal prices, the outlook for thermal coal prices is also robust and the contract price for this variety of coal is projected at $80 a tonne in 2010-11.
“The spot price for internationally traded thermal coal in the second half of this financial year is likely to hover around $70 a tonne. This may primarily be attributed to strength in demand from power producers in emerging markets, including India”, said Dipu.
In the domestic market, CIL has sought a moderate hike in coal prices as its average prices were 30-40 per cent cheaper than the prevailing international prices. The prices of coal in India were last revised in December 2007.