Coming up short

In late November of last year, 70% of India’s power generating capacity was struggling with “critical” shortages of thermal coal, either because power plants had produced more power than forecast or because they had received less supply than expected. Some 52 of India’s 89 thermal power plants had less than seven days worth of coal supply stockpiled, with 31 at “super-critical” status, according to figures from the Central Electricity Authority (CEA).

This state of affairs is by no means unprecedented: the coal shortages noted in late 2011 were only marginally worse than those recorded by the CEA a year earlier. In recent years India’s power deficit has run at around 10%, despite a substantial increase in output.

As economic growth spreads across the country, not only are existing consumers demanding more energy but the political bandwagon to spread electricity access across the populace is gathering momentum. The net result is that India needs to generate a lot more electricity in the decades ahead than it does now, and this is creating huge opportunities for thermal coal suppliers, both at home and abroad.

Power capacity and consumption

At the start of Q2 2011, India’s installed power generation capacity totalled 173,356 MW, making India the fifth largest power producer in the world. Of this, some 53% was coal-fired power generation.

Salva Resources calculates that India has boosted its coal-fired generating capacity by some 35% in the last six years, and this is set to accelerate in the coming years. In the 2010/11 financial year alone, around 10 GW of coal-fired power was connected to the grid and Salva Resources forecasts another 17 GW will be added in each of the next two financial years.

Chris Urzaa, director of commercial services at Salva Resources, says the fundamentals of power generation in India would be very supportive of coal-fired generation moving forward and would particularly favour the use of imported coal.

“While electricity consumption has increased strongly in recent years, per capita consumption in India remains very low, at 738 kWh: well below developing country standards, and less than a third of China’s and Brazil’s,” he said. “This is due to a number of reasons, including India being in the early stages of economic development, large parts of the country not being electrified and power supply struggling to match demand.”

Recognising this, the Government deregulated the power generation sector in 2004, and now private players are entering the market in a big way. Their market share is anticipated to be over 30% by 2015.

While it is clear that new electricity capacity funded by private producers will play an ever-larger role in India’s power production, and that much of this new output will require coal imports, exactly how much coal will need to be imported remains subject to debate. Long-term forecasts for India’s growth in thermal coal imports by analysts vary more than for any other specific bulk cargo trade.

One reason for this is Coal India Ltd (CIL). As the prime producer of coal in India – and as the world’s largest coal producer – the future of India’s electricity production and its coal import needs will depend on CIL’s ability to increase domestic supply as new generators come online.

Supply and demand

CIL produced 431.32 million t of coal in the year ending March 2011 and forecasts that it will produce 452 million t in the year ending March 2012. It supplies over 80% of India’s coal, over 40% of its total primary energy requirements and feeds 82 of the country’s thermal coal-fired power plants.

As a 90% state-owned company, CIL is charged with providing coal at prices discounted to international prices and devoid of price volatility to “make the end user industry globally competitive.” However, despite the impressive size and scope of this behemoth, some – not least those industrial users left short of coal supplies recently – would argue that CIL is not proving an effective vehicle for ensuring India’s industrial competitiveness.

To their credit, the company’s managers have long since recognised that meeting national demand will not be possible with CIL alone because economic growth is far outstripping its ability to boost indigenous production. Coal imports are inevitable.”

But the extent to which coal imports are required is the key issue vexing the coal industry, and this is where analysts differ. According to figures from IHS Cera, in 2009 thermal coal imports to India totalled 60 million t and will reach 90 million t this year and 110 million t by 2015. However, others put those figures far higher. Drewry, for example, expects coal import demand to pass 300 million t in 2015 and then rise to over 400 million t by 2019. But much depends on Government power policy and the extent to which domestic output can be increased.

Pricing

Another key factor in the debate is Government policy on electricity pricing. This is a major issue, both politically in India and for investors. If private investment is going to be attracted to India’s power and mining sector to help boost output, banks will need proof that returns can be guaranteed. And, with coal prices historically high, for many projects those guarantees cannot currently be made while tariffs for consumers are kept low by the Indian Government. Power providers already operating in India have been asking the Government to revise electricity tariffs to reflect the higher cost of coal.

Author: Mike King

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