War impact on coal: High global prices may lead to domestic crunch

ICRA has estimated that imported coal prices are set to rise 45-55 per cent in the first quarter of the upcoming fiscal as non-Russian coal supplies would not be able to compensate for the shortage in Russian supplies of coal . ICRA also noted that a coal shortage was likely unless Coal India is able to ramp up domestic coal production to 700 million tonnes in the next fiscal up from about 601 MT in FY21.

The price of Australian coal for March delivery hit an all-time high of about $330 per tonne. Australia and Indonesia are key sources of coal import for Indian thermal power generation companies using imported coal.

“Prices of imported coal are poised to spike by ~45-55% Q-o-Q in Q1 FY2023 as markets face supply disruption following the Russia-Ukraine conflict,” ICRA said in a report noting that the price of international coal was likely to remain elevated throughout the upcoming fiscal. The price of domestic coal has also risen sharply in spot e-auctions conducted by Coal India Limited with premiums over baseline prices set by Coal India reaching an all-time high of 270 per cent in February 2022 which have reportedly increased further to about 300 per cent in March 2022.

The high cost of imported coal had last year contributed to a number of such gencos not supplying power as per Power Purchasing Agreements (PPAs) with discoms leading to increased pressure on gencos using domestic coal. The power ministry released a circular on Saturday calling on states to take legal action against imported coal based plants that do not offer power supply contracted in PPAs due to high cost of coal.

A shortage of domestic coal stocks at thermal power plants had last year led to rolling power cuts across a number of states and forced discoms to procure power from exchanges at record high prices of Rs 20 per unit at the peak of the crisis in October.

“As per ICRA’s estimates, given the prevailing low coal stocks, and the steadily rising coal demand, Coal India would need to increase production significantly to ~700 MT in FY2023 to avert a domestic coal shortage next fiscal,” said Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA.

A domestic coal shortage will likely lead to low supply of domestic coal to non-power sector consumers such as steel, aluminium and cement producers forcing them to procure more expensive power from the grid and blend of more expensive imported coal to keep their plants running according to industry sources.

Experts noted that while the impact of higher coal prices on power consumers may be felt with a large lag as any tariff revision would require approval of regulatory commissions, higher input costs may be passed on faster by the steel, aluminium and cement sectors based on market conditions.

“Depending upon how the demand and supply situation is, steel companies may be able to pass it on to consumers. They generally try to absorb it when there is not enough demand in the system but when the demand increases they tend to pass it on,” said DK Pant, chief economist at India Ratings.

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