Demand-supply dynamics to keep imports at bay

Sumit Maitra

As Indian economy gets unshackled from the lockdown, though in a gradual manner, comfortable stock at power plants and subdued demand for electricity create enabling condition for lowering of thermal coal imports being targeted by the government in a new era of Atma Nirbharata or the sense of selfsufficiency.

While power demand declined sharply during January-June period, domestic coal output was quite resilient resulting in partial import substitutions.

With lower demand and generation, the capacity utilisation rate or plant load factor of thermal power plants during April-July dropped to multi-year lows of 48.3 percent, which was 13 percent lower than a year ago. With an increase in generation, the capacity utilisation improved in July from the lows of 42 percent in April.

There are hurdles to achieve this goal of import substitution namely significant drop in international coal prices and global supply glut which is forcing many mines to work in uneconomical ways, creating the prospect of cheaper dumping at the expense of domestic coal.

While Coal India has been providing concessions to buyers, fuel prices for power plants, being largely fixed in the form of notified prices, are unlikely to get readjusted to reflect changing market dynamics.

And Coal India being a near-monopoly supplier to the power sector, would refuse to revise its prices for its major customer, the power sector, to protect its margins.

Things would be different once commercially mined coal is made available to domestic consumers and Coal India is forced to play along with numerous other merchant producers.

But that reality would get realised at least five or six years after commercial coal auction is executed successfully.

Till then Coal India would only need to compete against import prices.

Coal-fired power generation is expected to retain competitiveness in India (where the coal fleet is only around 10 years old on average) and other populous, low income emerging markets, for a much longer time. Large, low cost mines supplying energy coal to seaborne markets will continue to be able to generate decent margins.

Global thermal coal price correction reflects demand shock

Asian coal prices are down by a steep 25 percent year till date and analysts are of the view that prices are likely to stay subdued at least till the end of 2020 as coal producing countries are stuck with their own unsold stocks.

Prices have reached closed to five-year lows now hovering at $50 a ton.

The Newcastle coal prices are down 24 percent since January due to reduced electricity demand in Australia’s key coal markets.

Thermal coal demand from India as well as Japan, Korea and Taiwan declined over the first half of the year in response to Covid-19, as utilities in these markets worked with lower Plant Load Factor rebalancing their generation and coal procurement with demand, and more competitive gas pricing.

“Indian demand for imported thermal coal has decreased sharply due to lock-downs imposed to deal with Covid-19, and a drive by Government to get industry to consume domestic coal. Vietnam has been a bright spot throughout the first half of 2020, with record coal imports,” said officials of New Hope Corp of Australia.

The 6000 kcal/kg FOB Newcastle index averaged around $61 a ton over the first half of 2020 with prices ranging between a high of around $74/t to a low of around $50/t.

That is below the 2015/16 trough in real terms.