Indian coal markets are seeing scattered defaults among end-user and trade buyers in part because of a 20 per cent slide in prices in 2012, although the vast majority are honouring their contracts, Indian traders said.

International coal prices have slumped to about $85 a tonne for South African cargoes from comfortably over $100 in December because of oversupply and tepid Asian demand.

The weakness of the rupee against the U.S. dollar, along with ever-tightening credit availability, is squeezing the trade middlemen who are holding high-priced imported coal inventories, traders have said.

"There are some defaults by smaller traders and also two cement makers," said a source at one of India's biggest coal importers, who declined to be identified.

South African producers, who supply India's traders and cement and sponge iron makers, said they had not experienced any direct Indian defaults but were wary of any indirect impact.

A default by any player on a cargo re-sold several times in a chain would have a ripple effect, producer sources said.

"We've not had any direct problems. They really have performed well as far as we're concerned but I have heard that a minority of the smaller players have had issues," one producer said.

"Some buyers (end-users) are actually defaulting now on fixed price contracts because they are being offered so much coal, of various origins, which were defaulted on by China," said an Indian trader who sells to both the Indian and Chinese markets.

"These distressed cargoes are being offered at huge discounts so the buyers just take them instead," he added.

"I have a cargo for China due to load in the next week which I've already agreed to drop the price on. I'm just hoping that it will be loaded and paid for," he added.

The discounts offered vary on a case-by-case basis, depending on how desperate the seller is to shift the cargoes, said an Indian coal market player who confirmed hefty discounts were on offer.

"On a standard $90 per tonne FOB deal, traders may offer $6-7 per tonne discount," he said.

India has 6 million to 7 million tonnes of thermal coal in inventories at its main ports, most of it imported at prices substantially higher than those at present.

Following a slew of defaults by Indian players in 2005, the industry has made strides to gain a reputation for meeting contracts, even when the market has plunged.

Suppliers flocked to the Indian market after widespread defaulting and price re-negotiation in China earlier this year.

Problems in the Chinese coal market have undermined Indian traders in their efforts to rebuild their reputation for meeting contract terms, Indian traders have said.

Some have experienced direct defaults from Chinese buyers, while Chinese defaults have led to some Indian counterparties trying to escape from contracts, they said.

End-users who had enquired for prompt cargoes are now sidelined, buried under cheap offers and saying they will not return to the spot market until August or September, they said.

"We have stockpiles of South African coal (in India) which were earmarked for customers but are just going to have to sit there. We'll be bleeding until Q4," the first Indian trader said.