Commodities 2022: Supply woes, volatility to keep India's coal importers on edge

Indian coal importers are bracing for another year of market volatility and supply upheaval as China's efforts to absorb plentiful cargoes to make up for the Australian supply vacuum, as well as production hurdles at mines across the globe due to the pandemic, will keep the market on tenterhooks.

Industry officials and analysts said that how Indian utilities manage their coal stockpiles in 2022, after a year of turmoil, will be a key factor that will determine availability in the domestic market, although the rising diversion of Australian coal flows from China to India offers a ray of hope.

"It may be assumed that the market will remain volatile as the year 2022 starts, but we may not see the sharp increase in prices that was witnessed in 2021," Subhasri Chaudhuri, secretary general of the Coal Consumers Association of India, told S&P Global Platts.

Prices of seaborne coal remained elevated in 2021 owing to a supply-demand gap following China's unofficial ban on Australian coal. Although Australia found new destinations for its supplies, such as Taiwan, Japan and South Korea, seaborne supplies from Indonesia, Russia and South Africa failed to satiate Chinese appetite during peak summer demand.

The price of Indonesia's 4,200 kcal/kg GAR coal price surged to a high of $158/mt FOB around mid-October from below $45/mt in early January 2021, according to Platts data. It then corrected sharply to $66.05/mt by the third week of December. The price for the grade averaged $67.70/mt FOB over the 12-month period.

The price of Indonesian 4,200 kcal/kg GAR is forecast to average $56.72/mt FOB in 2022, according to S&P Global Platts Analytics.

Similarly, the price of Australian 5,500 kcal/kg NAR touched a high of $174.50/mt FOB Oct. 19, rising from $50.50/mt in early January and then easing to $104.20/mt by the third week of December, according to Platts data. It averaged $82.20/mt FOB over January-December.

According to Platts Analytics, supply challenges will continue to restrict production, which will limit coal exports to around 2021 levels in 2022.

"We will not see a return to pre-pandemic seaborne import demand levels above 1 billion mt in 2022," Platts Analytics said in a report. "Additional renewable capacity in China and India, as well as a lack of coal-fired power plant build pipeline, will cap seaborne import demand."

Dwindling inventories

India faced severe coal shortages in 2021 as buyers deferred imports when the delta variant of COVID-19 ravaged the country, while further deferment was done due to a surge in seaborne coal prices. This pushed end-users to rely on domestic coal and use existing stockpiles.

According to India's Central Electricity Authority, stockpiles at power plants fell below 7.3 million mt Oct. 10, sufficient for just four days of coal burn, with 115 power plants at critical stock levels.

The stockpiles stood at 37.4 million mt on Jan. 1, 2021, and rebounded gradually from the Oct.10 low to 23.5 million mt by the third week of December, the data showed. It is now sufficient for about nine days of coal burn at a daily requirement of 2.765 million mt.

The increase in coal stockpiles was the result of an increase in production and dispatch rates by state-owned Coal India Ltd.

"The government has taken several proactive steps and Coal India has prioritized coal supply to the power sector. In November, the situation slightly improved for the non-regulated sector consumers as well. Supply may be prioritized to the power sector till the coal stockpiles at power plants are sufficient for the stipulated number of days as per CEA norms," Chaudhuri added.

Lukewarm mining interest

As a step to meet India's increasing energy demand and to lower imports, the federal government in 2021 initiated an auction process to sell coal blocks to private players for commercial mining.

However, the first three rounds of auctions attracted a lukewarm response from investors, with most blocks being rolled over and offered again in subsequent rounds.

In December, New Delhi put 99 coal mines up for sale in a fourth round of auctions, a day after it announced that bids for only 20 mines were received out of the 88 blocks offered in the third round.

"Huge capital investment is required for acquiring coal blocks, depending on the geological reserves. With the global focus shifted toward renewable energy and green fuel, getting overseas investment in the coal sector might be an uphill task," Chaudhuri said.

She added that coal blocks offered in the second round were mostly unexplored, which would require potential investors to undertake extensive exploration activities in the area.

"The investors would evaluate whether coal production in the respective area will be geologically and commercially viable. These factors may play a key role before investing in a commercial block," Chaudhuri said.