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Coal crisis a litmus test for India's resolve to eliminate imports

Highlights

Second wave of the pandemic disrupted the coal supply chain

Coal stockpiles at power plants sufficient only for a few days

India exposed to spot market wild price swings: Platts Analytics

Surging power demand to support an economic revival, import slowdown due to high global prices, and seasonal disruptions have created coal shortages in India that have not been not seen in years, raising fears of widespread power cuts and triggering a broader debate on the country's preparedness to shed its dependence on imports.

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Some coal-powered plants may be staring at a dark festive season as the supply squeeze has come at a time when power demand is typically at its highest of the year.

"India is more exposed to the international spot coal market as it does not have many longer-term supply contracts. So, when spot prices jump, you see a corresponding decrease in imports," said Matthew Boyle, manager of global coal and Asia power analytics at S&P Global Platts.

"These imports have declined to a point where you see a sharp fall in plant load factors, which is what we are seeing at the Gujarat coal-fired plants now," he said.

At the heart of India's coal woes is a broken procurement schedule that occurred when the Delta variant of COVID-19 disrupted the economy and trade flows earlier in the year.

Thermal coal power plants typically procure their supplies for the year in April-June but plans were disrupted as power demand looked uncertain, with no visibility on how quickly the virus would be brought under control and how much time it would take for the demand to return to normal.

Economic activity began recovering in June-July but there was reluctance among power producers to import because of high global prices. As a result, power producers started relying on domestic stockpiles.

This reduced coal stockpiles at power plants to 7.33 million mt Oct. 7 from 37.56 million mt Dec. 31, 2020. The sharpest drawdown was in June-August when stockpiles fell to 12.76 million mt Aug. 31 from 28.8 million mt May 30.

Changing trade flows

The change in global trade flows also had an impact on India.

China imposed an informal ban on Australian coal in 2020 and resorted to importing from other countries, including Indonesia. While there was strong coal demand from China, unseasonal rains and a COVID-19 wave in July-August impeded coal production in Indonesia.

In addition, while demand for Australian coal rose in Japan, Korea and Taiwan, record-high prices of natural gas also forced European power producers to look for Asian coal, pushing up global prices.

According to data by Iman Resources, India's imports from Indonesia fell 10.73% year on year to 52.1 million mt in January-August, and inflows from South Africa fell 18.76% on the year to 18.9 million mt.

"Indian buyers expected the price to come down in August, which is usually a dry period in Indonesia. But this year, heavy rains along with COVID-19 did not allow production and exports. Therefore, prices went up, with traders also holding onto cargoes," an Indonesia-based producer said.

The FOB price of 4,200 kcal/kg GAR coal from Indonesia rose 211.9% from $44.4/mt on Jan. 4 to touch a record-high of $138.5/mt Oct. 12, Platts data showed. In the same period, the FOB price of coal from Richards Bay, South Africa rose 235.1% to $201.9/mt and that from Newcastle, Australia rose 174.9% to $138.8/mt.

According to Central Electricity Authority data as on Oct. 11, the number of plants with critical stockpiles -- less than eight days of coal -- stood at 116 with a capacity of 142.05 GW, or 86% of the total capacity of 165 GW. The government has also pointed at the longer-than-usual monsoon period as a hindrance to increasing supplies.

Striking a balance

India's coal ministry has repeatedly said it plans to eliminate coal imports by 2024 and state-run Coal India has reiterated its commitment to achieve its production target of 1 billion mt by 2023-24.

"I don't expect India to become totally indigenous with coal because of high inland transportation costs for coal users located near the coastal area. Domestic coal becomes unaffordable for utilities to transport to western or southern regions in India," said Vasudev Pamnani, director at Lavi Coal Info Private Ltd.

Some market participants do not believe India can afford to reduce power consumption and consequently its economic growth due to unaffordability of coal. They believe that the Indian government will step in if required to support plants in procuring coal from international markets.

"Importing coal is a short-term measure which has to be decided by market forces," Harry Dhaul, director general of the Independent Power Producers Association of India, told Platts.

"However, there is a larger issue on the horizon and that is if all thermal projects are shuttered citing insolvency and environmental concerns, then it leads to a bigger problem as renewables alone cannot meet the consumption demand. So a balance has to be struck between the two," he added.