As India played a wait game on international prices, here’s how the coal shortage hit home

When the world’s two largest coal producers complain about a supply shortage, it’s time to prepare for bad weather. China has been forced to cut off electricity supplies to industries and homes amid severe coal shortages. And, now, stocks at three out of four coal-fired power plants in India have fallen to critical levels due to a failure to consolidate supply through imports. This is how we got here.

Why is India facing a coal crisis?

As the global economy emerges from the downturn caused by the Covid-19 pandemic, there is suddenly a thirst for energy that has driven prices up even as major coal-producing countries have failed to increase their prices. supplies to meet demand.

While India has the world’s fourth largest coal reserves, it is heavily dependent on the international market for its coal needs and is the world’s second largest importer and consumer of ore.

Amid the rebound in economic activity, reports indicate that global coal prices are at their highest level in years. According to a Bloomberg report, “European coal has peaked in 13 years, and Australian coal from Newcastle has jumped 250% since last September to fall within the range of the record set in 2008”.

That’s not all. The price of a high-quality type of Indonesian coal is said to have jumped more than 125%, from 44.4 USD / MT in January of this year to a record 100.05 USD / MT in September.

Due to the surge in prices, China and India, which already have significant coal production capacities, have given up buying coal on the international market, hoping to wait for prices to cool down, counting in the meantime on domestic production to continue.

“Faced with the hottest coal market on record, Indian buyers avoided importing it and relied on domestic stocks to such an extent that domestic stocks have now fallen to the lowest levels seen in more than three decades. years, “said a Sept. 30 report from S&P Global. Platts.

How bad is that?

Data on coal stocks in thermal power plants managed by the Central Electricity Authority (CEA) showed that as of September 29, up to 16 coal-fired power plants had “zero” stocks, while another 37 plants had stocks to last between 1 and 2 days. Overall, 103 such factories out of a total of 135 had stocks that lasted no more than seven days.

Citing data from the CEA, the S&P Platt report says India’s total coal stock fell from just over 37 million tonnes at the start of 2021 to around 8.3 million tonnes on September 27, “sufficient only for five days of burning coal”. quarters of India’s total coal production is used by thermal power plants, which provide more than 70 percent of India’s total electricity production.

The supply crisis comes against a backdrop of significant increases in energy consumption, with average demand increasing by 23 GW year-on-year to 186 GW between August 1 and August 23 of this year.

Similar increases in energy consumption have been recorded around the world, from China to Europe, without any parallel growth in production, even as the winter season approaches, a period of energy consumption. higher driven by domestic heating needs. Bloomberg said that “European coal use is expected to increase during the winter amid declining renewable energy production, record natural gas prices and planned shutdowns of nuclear reactors.”

Among the factors that have disrupted the pitch is China’s feud with Australia which has its roots in Canberra’s call for an investigation into the theory of the origin of the laboratory leaks of the novel coronavirus. Beijing has imposed tariffs on Australian agricultural products and suspended imports of coal from the country, which has been one of China’s biggest suppliers.

While thermal power generation in China this year through August was 14% higher than last year, domestic coal production increased by less than 5%. While it is not possible to increase coal production overnight when it comes to coal, mining in China has been the subject of “security crackdowns after series of fatal accidents highly publicized ”.

In addition, global coal supplies have plummeted due to heavy rains in countries like Colombia and Indonesia, even as other large producers have faced mine closures due to the pandemic.

What are we doing to deal with the situation?

The S&P Global Platt report says India finds itself “blinded by both high prices and lack of supply” after “waiting too long to start restocking, believing prices would correct soon.” It now faces the prospect of scouting for supplies amid a further surge in prices, with Chinese authorities saying they will increase the supply of coal at “any cost to provide heating and power generation. in winter”.

The country is already counting the cost of not restocking at the right time in the electricity rationing of its industries which has led to a downward revision of its GDP growth forecasts.

As for India, a CRISIL report indicates that demand for electricity is expected to remain high in the coming months given “the increase in industrial productivity. [and] looming holiday season which is stimulating commercial demand “.

To maintain adequate supplies and avoid pressure on power generation, the Union’s electricity ministry reportedly asked thermal power plants to increase imports even as state-owned Coal India ramped up production . The CRISIL report noted that while the monsoon season normally marks a decline in charcoal production, “production in July and August 2021 remained high at 48 MT on average compared to the historic 41 MT, with domestic producers ensuring a supply. increased “.

But as the monsoons – which are the peak season for hydro and wind power generation – end, the dependence on coal-based production is likely to continue, CRISIL said, noting that this means that “coal stocks in thermal power plants will improve only gradually by next March”. By then, thermal power plants will have to be content with 10-day stocks “against a two-year average of around 18 days,” he added.

Will the coal shortage result in higher electricity prices?

The S&P Platt report said that “market players are now waiting to see whether India’s demand for electricity will hold up and how utilities will pass on the costs of securing fuel.” This is especially the case when elections to the Assembly, including in India’s most populous state, Uttar Pradesh, are scheduled for next year.

Domestic coal prices have remained stable even as international rates have skyrocketed. And, although it is reported that Coal India has said it will raise prices, it is not known when that will happen. In any case, electricity tariffs in India continue to be among the lowest in the world “because state-run distribution companies have absorbed higher input costs to keep tariffs stable”, even at the cost of a cumulative debt of billions of dollars.

The Reuters report noted that “Indian power producers bound by long-term agreements with distribution utilities often cannot pass on higher input costs unless clauses are included in their contracts. “.

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