Coal to India Beating China on Supply Shortfall
Wednesday, 22 February 2012 | 00:00
India is poised to surpass China as the world's biggest thermal coal importer as the government seeks supplies for power producers that have halted plans for $36 billion of new plants because of a fuel shortage.
Purchases from abroad may exceed 118 million metric tons in 2012, compared with China's 102 million tons, said Daniel Hynes, a director of commodity research at Citigroup Inc. in Sydney. Imports may rise after the government ordered state-run Coal India Ltd. to plug a local shortfall with foreign supplies, according to analysts at Sanford C. Bernstein & Co.
India's likely emergence as the world's biggest coal buyer underscores a dearth of domestic fuel that has prompted companies from billionaire Anil Ambani's Reliance Power Ltd. to Adani Power Ltd. to mothball plans for expanding electricity capacity. India's $1.7 trillion economy grew the least in two years in July to September as power and factory output slowed. At the same time, China is adding twice as much coal-production capacity this year than in 2011, according to the National Energy Administration, reducing its import needs.
"Coal shipments to China will get diverted to India," Michael Parker, a Hong Kong-based analyst at Bernstein, said in an interview. In China, "power consumption growth rates will continue to decline and coal production and transport capacity growth are rapidly improving."
The deficit between the demand and supply of domestic coal in India may rise as high as 150 million tons by 2014 should the country fail to increase locally sourced supplies by 6 percent this year, according to Hynes. The nation is seeking to improve infrastructure to achieve an average economic growth rate of 9 percent in the five years starting April 1.
Thermal, or steam-coal imports by China will drop this year by about 40 million tons, an amount that may be bought by India instead, Parker said. China's purchases rose 17 percent to about 138 million tons last year, excluding coking coal used to make steel, customs data show.
China will add 200 million tons of coal-production capacity this year, compared with 95 million tons in 2011, according to the National Energy Administration. Power consumption grew 11.7 percent last year and may increase 8.5 percent this year, the official Xinhua News Agency reported Jan. 11. Coal output increased 11 percent in 2011 and may grow 6.6 percent, according to Bernstein estimates.
India imported 81.1 million tons of steam coal for its power plants in 2011, according to New Delhi-based Interocean Group, a shipping brokerage. Annual overseas purchases may rise by 74 percent, or 60 million tons, in four years, according to K. Raja Gopal, chief executive officer at the power unit of Lanco Infratech Ltd., India's second-largest non-state power utility.
"If Coal India is forced to supply new power plants with coal, the upside potential for thermal coal imports is significantly higher than 118 million tons," Citigroup's Hynes said in an e-mail.
Coal India reported a 2.7 percent drop in production to 291.2 million tons in the nine months ended Dec. 31, according to a Feb. 13 statement. Operations were curbed by rains, while the development of new mines was hampered by delays in land acquisitions and environmental approvals.
"There's a chance that India can surpass China's current import levels," Hiranyava Bhadra, a partner at KPMG's Indian unit, said by phone from Mumbai. "It will depend on the availability of sourcing infrastructure and the ability of the distribution system to afford more expensive fuel," he said. Imports will climb to about 250 million tons in 2017, according to Bhadra.
Stick, No Carrot
Coal India must pay a penalty to power producers should deliveries fall to less than 80 percent of the contracted quantity, according to the government, forcing the mining company to meet its commitments through imports. Buying the fuel from Coal India would eliminate the financial risk of importing it directly for Reliance, Adani and other power producers.
"They import what they can pay and if they can't pass through fuel costs and sell at regulated tariffs they will be squeezed," said Emmanuel Fages, the Paris-based head of energy research in Europe at Societe Generale SA. "The new regulation is a stick, but I don't see where the carrot is."
Coal India scrapped a proposal to buy the fuel this year and suspended a separate plan for annual imports over a decade because of disagreements with customers on deliveries to plants, three people with knowledge of the matter said Feb. 2.
Fuel shortages are being exacerbated by a lack of trucking and reliable railway network to transport coal inland from ports. Thermal coal supplies at ports may be as much as 9 million tons, Citigroup said in a Feb. 6 report. Some mines are operating at one-third of their capacity because they aren't receiving cargoes, the report cited Coal Secretary Alok Perti as saying.
"Coal India has to make a more serious effort for imports now," Perti said in a Feb. 16 interview in New Delhi. The company plans to produce 440 million tons of the fuel from domestic mines in the year ending March 31, according to Perti. The production target for the next 12 months is 464 million tons, he said.
"We have asked Coal India to consider giving power companies higher coal supplies," Coal Minister Sriprakash Jaiswal said Jan. 18. "It's not possible to increase coal output overnight, but we are doing our best."
India's peak power deficit was 13.1 percent in December compared with 10.3 percent in January last year, according to the Central Electricity Authority. The nation had 187.5 gigawatts of installed capacity as of Jan. 31, more than half of which uses coal, according to the data.
Higher imports, when blended with local coal, will result in a "marginal" increase in cost which Coal India can pass through, Gopal said.