What exactly caused the coal crisis?
In a way, it is hard to say whether it was the coal crisis or the power crisis but in a way it was a bit of both. Like in any commodity crisis, the coal crisis also had a demand and supply angle to it. That means a double whammy. Let us look at the demand factors now.
In India, a delayed summer meant that the cycle of higher power consumption lasted longer than normal. That added to the power demand. More importantly, it was a case of office and industrial demand coming back in a big way. COVID restrictions were being lifted and activity was getting back to normal. The logical corollary was increase in demand for power. The demand for power created a surge in demand for coal.
Let us look at the more important supply side factors. In India, nearly 80% of the coal production is by Coal India. Singareni Collieries, the only coal mine in South India, producers about 8% of India’s coal output and all the other smaller mines and captive mines put together produce the balance. The supplies got disrupted due to the delayed monsoons which derailed the coal mining activity. Adequate coal blocks were not created and that contributed to the coal shortage?
But, why cannot we just import coal?
This was actually the major factor that triggered the coal crisis in the first place. Normally, the large power companies do rely heavily on coal imports from Australia and Indonesia to meet their shortfall of coal requirements. Coal prices were normally tepid and never created problem for power companies. In the last 6 months, that changed drastically.
The coal supply did match up to the revival in demand forcing a sharp spike in coal prices. This is true of all commodities but coal was perhaps most prominent. The price of coal went up nearly 4-times in a span of 6 months making it the most prolific commodity price rallies in the world. To add to that there was a surge in demand from China which also led to a spurt in coal prices across the board; since like India, China is also 70% thermal power.
Most Indian power companies do not have much leeway on pricing since power prices are governed by the power purchase agreement (PPA) signed with the state governments. The imported coal prices had reached a stage when it was not possible for power producers to use imported coal any longer from a long term viability perspective. This put more demand pressure on coal India and actually triggered to the crisis.
Is the crisis spilling over to other sectors?
In a way, the crisis has been spilling over to other industries. Consider the following cases.
- The aluminium industry in India is extremely power intensive but aluminium plants use captive power plants. However, during the coal shortage, Coal India had prioritized the power generation plants over captive plants. That has forced many aluminium units to the brink of production shortage.
- Steel has been negotiating coking coal needs with Russia as the domestic demand is getting hard to meet. For the steel industry, coking coal is nearly 40% of the cost and the crisis has put a huge cost on them.
- Textile industry is the latest to report that it is on the throes of a crisis as coal supplies are down to just a few days. Most power companies are already operating at 3-4 days of power supply and that will only improve after Diwali.
- Lastly, higher coal prices is boosting crude oil prices as an alternate energy source. Recent results of even FMCG companies indicate that this commodity price binge is hurting hard.
For a start, the government has prioritized power plants for coal supply. The stocks are improving but as per the recommendations of the Central Electricity Authority (CEA), coal stocks at power units must reach at least 15-20 days to be really comfortable. That will take some time to build and till then the spill over effect is likely to last.
The second measure, and highly appreciated, is the move to create strategic coal and gas reserves on the lines of the strategic petroleum reserves. It is high time India did that since this idea of just-in-time inventory does not appear to be working in the current volatile macroeconomic environment.