Gas-starved Europe's revival of coal plants spells bad news for India

This week, the chief of the Indonesian Coal Mining Association said Indonesian coal miners expect Germany will be their third largest importer by 2023, just behind China and India. The over 150 per cent rise in prices of the fuel across Europe since January this year – a fallout of the gas supply crisis after Russia invaded Ukraine, has made this seemingly absurd ranking possible. More to the point, it has implications for India, which has been an increasing net importer of coal in recent years.

The huge price rise in Europe has made coal mines nearer the continent, such as South Africa, pivot even more to those markets. As demand from China also shoots up – a result of climate change drying up hydel-power producing rivers -- Indian imports could be impacted. One reason India has narrowly escaped being singed this season is that production from the state-run Coal India Ltd (CIL) has risen sharply this year. It was 22.74 per cent up, year on year, between April and August, 2022. The other reason is the better management of CIL supplies by the Railways has ensured the annual monsoon crisis at power plants did not occur this year.

But as no Indian government agency makes even a yearly forecast for demand and supply of energy fuels, including coal, it is pure guesswork from here how imports, which account for close to a third of India’s total consumption of coal in the pre-Covid years, and the global supply shortage will pan out for the economy.

One easy guess is that the coal balance for the months ahead will not be comfortable. Unlike oil, whose demand tracks the global ups and downs in GDP of key nations, coal demand is more rigid. It lights up power plants to provide electricity in the winter for the homes in Europe and China. Those heating demands will not come down much, even if there is a recession. 

Already, inventory at China’s Qinhuangdao port, the world’s largest coal terminal, is down 16 per cent in August, sequentially. Coal loading for exports at Australia’s Newcastle port has been affected by a shutdown and floods in the mining areas. Disruptions are afflicting major ports in many countries as they try to handle the massive surge in demand for coal, according to reports by market intelligence firm, CoalMint.   

Essentially, the market for coal has become extremely tight. The chief reasons are the European gas crisis, which has sent demand soaring for every possible tonne of coal. Germany’s largest power producer Uniper has revived coal-based power production after stopping in 2020. It is the same story across the border in Poland. Polish bank Pekao has reversed its policy to permit the financing of coal trade. Demand for coal is also soaring in China as it prepares for winter. To compensate for the sharp fall in production of hydro-electricity, Beijing is stocking up on coal, madly. July data shows China imported 15 per cent more coal from Russia than the previous year. That makes it the highest import level in five years. 

Those imports are welcome news for Russia, blocked out of the European market, to which it used to sell almost half of its production. India has also begun to import some Russian coal. But the long sea voyage adds to the costs. So whichever source New Delhi might look at, all have become costly. 

Coal consumers in India are taking evasive action to save their balance sheets. They have begun to prepare cocktails of coal imports from different sources. Sponge iron manufacturers in eastern India, whose output prices vary with every swing in prices of coal, are now blending costlier Australian coal with South African cheaper products, sometimes even on the high seas. 

The other coping mechanisms are not very good news. Coking coal imports from Australia to India in August have fallen to a two-year low. Coking coal is mostly used to manufacture steel. Since India’s domestic production of domestic coking coal has been flat for decades, it is chiefly Australian imports that have fed the Indian furnaces. Indonesian and South African coal is mostly of the non-coking variety, useful for feeding power plants. The lower Australian imports essentially mean the weaker steel producers are easing off their production lines due to the costs. This has major implications when India is undertaking a huge expansion of infrastructure investments. 

The data is not showing up now but will certainly do so in the subsequent months.  In July, steel production increased 5.7 per cent, year on year. The cumulative index for the metal has increased by 6.5 per cent in this financial year.

Matters could have been slightly better if the commodity exchange for coal had been rolled out by now. It has been given in-principle approval in 2021 but is taking time to become operational. The market could have offered pointers to businesses on the demand side on how the price of coal and its supply would pan out. The e-auction mechanism for domestic coal offers a measure of supply and demand for only domestic production. A larger coal market would allow Indian importers to send out stronger price signals. 

As of now, without a government forecast and no commodity market, it is extremely difficult for the consumers to plan ahead. Finance Minister Nirmala Sitharaman had this week berated the domestic industry about not increasing investments. But without price signals for the coal-dependent sectors, there is a big problem in adding capacity.  

For instance, the global coal shortage should have spiked interest to bid for coal mines in the ongoing auctions. Shares of Adani Enterprises, which handles coal imports for the conglomerate, have risen 118 per cent since January this year. But in the fifth round of auctions in September, bids came in for only 15 coal blocks against a pool of 100 blocks on offer. Finally, only eight bidders stayed in the race to pick up stakes close to the reserve prices. The only exception was Vedanta, which paid a premium to pick up a mine adjacent to its existing coal blocks in Ib Valley in Odisha. 

Despite all the noise from climate change activists, the prices of coal, the quintessential dirty fuel, will continue to make headlines through a good part of this decade.