Coal shortage has come back to haunt India. The Russia-Ukraine conflict has derailed the supply chain and the debt rating agency ICRA has said that it can raise the price of imported coal by 45-55 percent in Q1FY2023. According to its calculation, taking a baseline scenario, prices are likely to be 35 percent higher in FY2023 than what they were in FY2022. If the conflict escalates, they see the prices going up by a further 30 percent over the base case. In an interview with Moneycontrol, ICRA’s Jayanta Roy talked about the risks facing coal supply in India.
The Senior Vice President and Group Head of Corporate Sector Ratings at ICRA elaborated on the ecosystem’s higher vulnerability because of depleted coal stocks, and the weak possibility of domestic producers being able to bridge the gap.
If the Russia-Ukraine conflict prolongs, what is the level to which coal prices could rise? Could it go beyond 55 percent rise Q-o-Q in the worst case scenario?
On March 8, 2022, one week into the conflict, seaborne thermal coal spot prices (RB1 grade) from South Africa touched an all-time peak of $430/MT. However, there has been a moderation subsequently, as buying interest quickly declined following this unprecedented rally. We therefore think that given the lead delivery time of approximately two months, imported coal prices would peak in Q1FY2023, with a 45-55 percent increase Q-o-Q, and moderate subsequently from Q2 FY2023. In the baseline scenario, seaborne RB1 grade thermal coal prices in FY2023 are expected to average at ~$215/MT as against $159/MT in FY2022 (around 35% hike over FY2022 average). However, in the pessimistic scenario, if the geopolitical tensions escalate going forward… we expect the average seaborne coal prices in FY2023 to be higher by ~30 percent over the base case.
How is the price rise affecting consumers?
Unlike the imported coal markets, where the cost pressures get translated in the P&L of consumers with a lag of around two months, users of domestic coal are already feeling the pinch in Q4 FY2022, as average spot e-auction premia touched 270-300 percent in February-March 2022, compared to 30 percent in February 2021. This is expected to increase coal costs for users sourcing from the spot-e-auction market by ~45 percent Q-o-Q in Q4 FY2022. We are seeing a reflection of this price increase in the spot power tariffs at the IEX, which averaged at around Rs. 6.4/unit in March 2022 (till date) as against Rs. 3.5/unit in February 2022 and Rs. 4.1/unit in March 2021.
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What are the supply disruption risks, other than the Russia-Ukraine conflict?
On the supply side, we are seeing that due to a slowdown in investments in mine development projects, the ability of other coal-producing countries to quickly ramp up production to fill the vacuum left by Russia remains constrained. So, in an already supply-constrained market, any future weather-related disruptions and/or a curb on exports (as was seen in Indonesia in January 2022) in key coal-producing regions can again put upward pressure on international coal prices.
Is there a risk of untimely rain affecting supply?
The most important thing in an energy system is to have surplus capacity at every leg of the supply chain. This is applicable for coal stocks as well, which, in the run-up to the peak summer months, remains quite low. As on March 13, 2022, combined coal stocks at Coal India’s pitheads and thermal power generation stations stood at ~74 million tonne (mt), as against ~128 mt as on March 31, 2021, ~120 mt as on March 31, 2020, and ~85 mt as on March 31, 2019… the vulnerability of the system to coal-production slippages remains high. Therefore, things like untimely rains and floods in coal bearing belts can lower coal availability in the domestic market.
The government has said that coal will be supplied to gencos and IPPs only on a proportional basis. How much can it help to manage the coal shortage?
As on March 24, 2022, the pithead thermal power stations had an average coal stock of 14 days (lower than the stipulated 17 days) and the non-pithead power plants had an average coal stock of 8 days (significantly lower than the stipulated 26 days). Today, around 90 GW of thermal generation stations have slipped to a critical level of coal stocks. Therefore, the Government is looking to temporarily roll out measures for proportionately rationing out the domestic coal available to power stations across the country so that regional supply shortages can be averted. But, the fuel supply agreements (FSAs) have penalty clauses if delivery slips below 75 percent of the annual contracted quantity (ACQ). Therefore, the coal supplies may not decline below a certain threshold for consumers having long-term FSA.
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How much can prompt unloading of coal from rakes help in improving domestic supply?
Around 75 percent of the coal dispatched by Coal India is through the railway route. Therefore, availability of an adequate number of rakes is critical for seamless evacuation of coal from the pitheads to consuming centres. Out of the aggregate ~90 GW of thermal power plants running on critical coal stocks, ~40 percent of these shortages are attributable to logistical constraints. Therefore, to make the evacuation infrastructure more efficient, the Government is also looking to reduce the trip turn-around time, through prompt loading and unloading of rakes. We believe that such measures can help increase the system throughput and improve the coal availability in the country.
The ICRA report has said that steel, cement, aluminium producers will encounter significant price increases. What proportion of their input costs is contributed by coal, and how much can coal shortage drive up prices for them?
For the non-regulated sectors such as steel, aluminium and cement, energy and coal costs account for between 30-50 percent of the overall cost of production. Given that non-regulated users procure a large share of their coal requirement from the open market, they remain significantly more exposed to the volatility in coal prices than the power sector.
Already, we are seeing steel companies increasing prices by 12% since end-February 2022 to cover for the rising input costs, and further hikes cannot be ruled out in Q1 FY2023, when the cost pressures would be even more intense.
By how much can domestic production be ramped up and how much of the additional demand can it meet?
With a gradual recovery in economic activity, domestic coal demand is expected to grow by a modest 5-6 percent in FY2023 as per our baseline scenario. As domestic users look to replace costlier imported coal with domestic coal, to the extent possible, coal imports are estimated to contract by ~14 percent Y-o-Y in FY2022, and this trend is likely to continue in FY2023 as well. This would put pressure on the domestic miners to ramp up production. Our calculations suggest that Coal India would need to ramp up production significantly to ~700 mt in FY2023, given the depleted coal stock level at the end of FY2022.
Also read: Why is India's dependence on coal hard to shake off?
Can Coal India meet the 700 mt target for FY23?
Reaching a 700 mt coal production in FY2023 would mean achieving an 11 percent Y-o-Y production growth. In the last one decade, Coal India has never been able to record a double-digit production growth. The closest it came was in FY2016, when its production grew by ~9 percent Y-o-Y. That itself would mean that Coal India faces an uphill task in FY2023 to adequately meet the domestic coal demand.
Why did Coal India not meet its FY22 production target?
Coal India, faced severe operational challenges during the second wave of the pandemic as many of its staff and workers got infected. This, coupled with the extended monsoons in the second quarter affected coal mining, leading to production slippages. We expect Coal India to fall short of the 670 mt targeted production for FY2022 by ~6.5 percent.
Can other mines such as Singareni Collieries contribute significantly more to meet this shortage?
With Coal India alone accounting for around 80 percent of the domestic production, it will be very difficult for the other miners to fully compensate for any large production slippages by Coal India in FY2023.
Coal production from captive and merchant mines, which account for ~10-12 percent of the domestic supplies, witnessed a strong pick-up in the last four quarters and is estimated to grow by ~32 percent Y-o-Y in FY2022, closing the year with the highest annual production achieved till date. As coal prices remain very elevated, we expect this trend to continue into FY2023 as well, with these miners poised to increase production by a further ~25 percent Y-o-Y.
The Singareni Collieries Company Limited (SCCL), which contributes ~8-10 percent of the domestic coal supplies, witnessed production plummet by 21 percent Y-o-Y in FY2021 following the pandemic outbreak. However, the recovery has been very encouraging in the current fiscal, and we expect the PSU miner to register a healthy 29 percent Y-o-Y growth in production in FY2022, surpassing its pre-Covid level of production. However, given the high base, SCCL’s production is expected to grow by a more modest 10 percent in FY2023.
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