As the coal shortage gets bad, the power situation could get worse

Today, India and China have reached a stage wherein power demand is surging, domestic coal supplies are stretched and international coal prices are just too steep.

Oct 08, 2021 07:10 IST India Infoline News Service

The title of an article in Nikkei Asia was ironic, yet said it all, “China and India send coal prices soaring amid green energy push”. The title is ironic because green energy presupposes reduced reliance on coal-fired thermal energy. However, the disconnect stems from the fact that most of the green investments are long term in nature. They just don’t offer a solution to the short-term surge in power demand. Incidentally, both India and China generate 70% of their power from coal-fired thermal plants.

Figure 1 - International Coal Prices over last 1 year ($ per tonne)
Data Source: International Energy Agency

The chart captures the gist of the story. In the last 6 months since April 2021, the price of coal has surged 4-fold from$65/tonne to $267/tonne. What is driving coal prices so sharply higher globally? What is the reason for the coal crisis in India? Finally, how will it impact specific Indian corporates.

Why have global coal prices surged?

In a way, the economics of global coal is closely linked to the economies of China and India. These two countries account for more than 65% of the total coal usage with all the other countries in the world jointly accounting for less than 35%. The problem gets more acute because China and India are also two of the largest importers of coal, followed by Japan and South Korea. Effectively, it is the demand from these 4 countries that virtually drives global coal demand.

If you look at coal supply, the biggest exporters of coal are Indonesia, China and Russia. After the controversy over the QUAD, China has reduced its dependence on Australian coal and is relying more on Russian coal. India has been depending heavily on Australia and Indonesia for coal supplies. But, why did coal prices rise?

It was all about demand shooting up in India and China. The surge in demand was due to the economic recovery plus an unusually hot summer, which increased power usage. Today, India and China have reached a stage wherein power demand is surging, domestic coal supplies are stretched and international coal prices are just too steep. That is the Catch-22 situation that coal and power companies find themselves in.

What has triggered the coal shortage in India

Like most crises in the past, the coal crisis is also an amalgam of factors at play. India’s daily consumption of coal has cross 4 billion units, the highest ever in history. Apart from the demand surge and the soaring global coal prices, India is also paying the price of unseasonal rainfall hitting coal mining this year. India also did not build adequate coal blocks ahead of the monsoons, which worsened the coal supply situation.

Since 2020 was an exceptionally tepid year due to COVID-19, it would be more useful to compare 2021 with 2019. The average coal consumption has increased from 106.6 BU per month in 2019 to 124.2 BU per month in 2021. Ironically, during this same period, the share of coal-fired power increased from 61.91% to 66.35%. If you just look at the months of August and September of 2021 and compare with 2019, coal consumption is up 18%.

How bad is the coal crisis in India?

In a nutshell, the coal crisis is really bad. Just look at some intimidating statistics here.

a) In FY19, the total coal demand was 644 MT, which was met with 582 MT of domestically produced coal and 62 MT of coal imports. For FY22, the estimated coal demand is 724 MT with imports just 46 MT and domestic output expected at 678 MT.

b) On 01-Aug this year, coal inventories for the power sector stood at 13.97 MT representing 13 days inventory. That has fallen sharply to just 8.08 MT in October, representing a mere 4-days of inventory.

c) Out of the total 135 coal-fired power plants, 72 plants had just 3-days stock while another 50 plants had inventories to cover up to 10 days of coal needs. Only 13 plants had reported more than 10-days inventory. The Central Electricity Authority had recommended the ideal inventory level at 21-days coal needs.

Clearly, the coal inventory levels are showing a high degree of vulnerability with serious repercussions for power supply in the coming weeks.

Who wins and who loses in the current crisis?

Like any crisis, the coal crisis is also going to produce its own share of winners and losers. Here is a quick update.

• Coal India should ideally gain from the coal shortage but coal prices are still regulated and not linked to global coal prices. The benefits for CIL would be limited as any price hikes would be calibrated keeping in mind the inflationary potential.

• However, captive miners like Hindalco, SAIL and Adani Power will stand to benefit as they are allowed to sell half of their output to ease the supply bottlenecks at this point of time. This will give then an added revenue stream.

• Sentimentally, the coal shortage should be positive for companies like Tata Power and Adani Green which are going aggressive on green energy.

Coal India has agreed to ramp up production and global coal prices cannot sustain at these levels for too long. For now, the coal and power crisis is for real, and it is hurting.

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