India’s coal shift a double whammy for Indonesian exporters

State-run Coal India is opening mines at the rate of one a month and expanding existing ones, as Prime Minister Narendra Modi fast-tracks environmental clearances to double output this decade and meet election promises to provide power to a population of 1.3 billion.

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That dash for production has left Coal India with a stockpile of more than 50 million tonnes of mined coal, but domestic demand is rising more slowly than anticipated, prompting it to start talks to export to neighbouring Bangladesh.

Not so long ago, Indonesian coal executives brushed aside concerns about slowing sales to China, citing strong Indian demand – suggesting they have underestimated India’s ability to quickly ramp up production.

“This is a threat to the Indonesian coal industry,” said Supriatna Suhala, executive director of the Indonesian Coal Mining Association (ICMA). “In future, we may have to compete with India. They may become an exporter to Asia.”

“DIRE TROUBLE”

“There’s been a tonne of closures in South Sumatra and Jambi (provinces) because that was all geared towards the Indian market,” he said, noting many mines producing nearby are in “dire trouble”.

In Indonesia, the shift in Indian demand is most keenly felt among producers of low-quality coal in southern Sumatra, said Ben Lawson, chief operating officer of Sanaman Coal, which owns a small, unopened mine in the region.

“There’s been a tonne of closures in South Sumatra and Jambi (provinces) because that was all geared towards the Indian market,” he said, noting many mines producing nearby are in “dire trouble”.

This could trigger more mine closures on top of thousands already shut across Indonesia due to weak demand and prices, piling the pressure on President Joko Widodo and an economy where coal mining accounts for around 4 percent of GDP.

Even larger firms such as PT Adaro Energy, Berau Coal Energy and PT Bukit Asam may have to cut jobs and output once long-term supply contracts to India expire, analysts say – though they are better placed as they have lower mining costs, investments in other businesses like power generation and are able to supply the higher grade, low-ash coal that India’s coastal plants rely on.

PRICE PRESSURE

While Modi’s manufacturing push could re-boot Indian demand, current production rates and stock levels signal that India, which has the world’s fourth-largest coal reserves, is likely to become an exporter of thermal coal for power generation.

A switch by such a big buyer will keep the pressure on world thermal coal prices , which have picked up from decade lows in January but are still well below where they were five years ago.

Anil Swarup, the top civil servant in India’s coal ministry, acknowledged the country’s low-quality coal could be a tough sell, particularly as higher grades are available at such low prices. Nevertheless, he said Coal India was in talks with Bangladesh over price and the quality of coal to be sold, and he hoped to “see some action on the ground in three months.”

Electricity-starved Bangladesh buys only around 3 million tonnes of coal a year, but consultancy Wood Mackenzie predicts demand could jump to as much as 15 million tonnes by 2020 as planned power plants worth at least $8 billion are built there with help from India and China.

SPOILT FOR CHOICE

India’s declining appetite for Indonesian coal is partly a result of low prices that have made higher calorific value coal available elsewhere more affordable.

“It’s impacting all the major export markets because now the Indians are not at a loss for choice, and you can see that from month-to-month they just skip around from South Africa to Indonesia,” said Lawson at Sanaman Coal.

Imports by India’s coastal power plants, which are designed to use only high-grade imported coal, rose around 3 percent to 43.5 million tonnes in the year to end-March, according to mjunction, an online trading platform.

Overall, India’s January-May coal imports fell 5.4 percent to 82.57 million tonnes, according to vessel-tracking data compiled by Thomson Reuters. Though Indonesia remained the top supplier, its sales to India fell by a fifth to 36.72 million tonnes, while shipments from South Africa increased by more than a quarter to 16.58 million tonnes.

Indonesia is now tapping other existing export markets, from South Korea and Taiwan to Japan, and may also target countries that don’t have large coal resources, such as Malaysia, the Philippines, Bangladesh, Pakistan and Vietnam.

It has also capped its production at 400 million tonnes and is fast-tracking power plant developments to use more domestic coal, said Suhala at the ICMA.

“Indian demand, the great saviour from falling China demand, has turned out to be largely fictional,” said Hans Lukiman, a small-scale Indonesian coal miner.