Aussie floods may affect TNB’s fuel costs.

News about massive floods in Australia might be the last thing that Tenaga Nasional Bhd (TNB) wants to hear, right at the start of the new year. Australia, the world's biggest exporter of coking coal and second-largest exporter of thermal coal, was reported to be hit by devastating floods over an area the size of France and Germany combined, forcing 75% of its coal mines to grind to a halt.

Thermal coal is used to fuel power plants while coking coal is used by steel mills to fuel their furnaces. Based on TNB's latest annual report, coal accounted for 48% of the group's fuel costs and 40% of its power generation.

In the financial year (FY) 2010, the group purchased 17% of its annual coal requirements of 18 million tonnes from Australia, 71% from Indonesia and 11% from South Africa.

It is, therefore, not surprising to see that research houses are becoming increasingly concerned over the impact of the flooding in Australia on TNB's earnings.

AmResearch, in its recent note, said Newcastle coal spot prices had risen 18% over the past month to US$126 per tonne, which was 26% above its forecast FY11 to FY13 coal price assumption of US$100 per tonne.

Based on the current coal prices and the exchange rate between the US dollar and ringgit, it is estimated that TNB's forecast FY11 to FY13 net profits could drop by 28% to 29%. “We estimate that a US$10 per tonne increase in the cost of coal, which is above our average coal cost projection, could shave TNB's FY11 forecast net profit by 18%.

“But we also note that the US dollar has depreciated against the ringgit by 3% to RM3.06, which can partly offset the impact of higher fuel costs,” the research house said. However, it said TNB's tariffs were reviewed bi-annually in January and July, with coal costs being a key component in the adjustment of rates.

“Hence, for now, we maintain our forecasts pending further guidance on TNB's coal costs,” it said. Moreover, it is believed there could be a seasonal factor to the spike in coal prices due to the unusually cold weather in Europe and the United States. “Every US$10 per tonne increase in coal prices will hurt TNB's earnings by 15% to 18%,” said MIDF Research. It said TNB had assumed an average coal cost of US$100 to US$102 per tonne for FY11.