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Coal inventory slides despite rising production levels

When the Narendra Modi government took charge in 2014, thermal utilities were running low on coal inventory and they made it a priority to reverse the situation.

Three years down the line, power plant coal stocks have fallen dramatically, and are now enough for 11 days of power generation, down from 22 days a year ago, and below the normative requirement of 20 days. This is, of course, still better than the June 2014 level of eight days.

Two reasons can possibly explain this. One, higher power generation may have contributed to higher coal consumption. Second, power plants may have purchased lower quantities, either because they are liquidating inventories or limiting purchases due to supply constraints. Let’s see what the numbers say.

Power generation

In the past year, 12 power plants were added to monitored capacity, adding 10,290 megawatts of capacity or an increase of 8%. Electricity generation was also strong in May, rising by 7% over a year ago, which could have resulted in higher coal consumption and lowered inventories. But this is a seasonal increase and companies should have been prepared for it. The comparable data on coal consumption by power plants is not available, which leaves an information gap in understanding why coal inventories are declining.

Coal supply

The coal stock, as of last week, at plants that have a fuel linkage is 43% lower than a year ago. Imports and domestic supply both seem to share the blame. The year under review has seen stocks of imported coal down by 45%, while stocks of domestic coal fell by 43%.

The total stock of coal had begun to see a noticeable decline from August 2016. The month also marked the start of a decline in Coal India Ltd’s output for three consecutive months. The latest reading on the fuel situation (29 June) is also following three consecutive months of drop in production at the company, between April and June.

An analyst who tracks the sector and did not want to be identified says some coal traders are sceptical about Coal India’s ability to cater to rising demand from power plants. Latest coal consumption figures are not readily available. Monthly data from September 2016 till May this year shows coal consumption by power plants (includes plants which take coal through the memorandum of understanding route) outstripping supply by a wide margin in several months.

Coal India’s production grew by 3.3% in fiscal year 2017 (FY17), slower than the 8.6% increase in FY16. Growth in the first six months of this calendar year stood at 2.3%, compared to 5.6% in 2016.

In sum, higher power consumption combined with a less-than-commensurate increase in coal supply can explain the higher drawdown of the commodity’s stocks, lowering stock levels. With the onset of the monsoon, a seasonal slowdown in coal evacuation can worsen the fuel availability situation.
Source: LiveMint

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