Coal crisis in India imperils energy-heavy commodity industry4 min read . Updated: 08 Oct 2021, 06:16 AM IST
- Coal inventories at power plants plummeted to an average four days this week, down from 13 days at the start of August, official data show
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An escalating power crisis in India, triggered by dwindling reserves of coal that helps generate about 70% of the nation’s electricity, threatens operations of commodity-related businesses ranging from oil refineries to aluminum smelting to meat processing.
Coal inventories at power plants plummeted to an average four days this week, down from 13 days at the start of August, official data show. More than half of the plants are already on alert for outages, with the government warning that the country could be facing a supply squeeze for as long as six months.
Power demand is expected to shoot up on some days as India enters a festival season from mid-October. The crisis also poses risks to Asia’s third-biggest economy, which has been recovering from an unprecedented 7.3% contraction in the fiscal year ended in March.
Here is a list of key commodity sectors that could be vulnerable due to the energy crisis:
There is a risk from power rationing, if the situation worsens further, especially at a time when oil refiners are focusing on producing enough gasoline and gasoil to meet improving demand in India and across the world.
The mega refineries also operate their own captive power plants as they can’t afford sudden shutdowns. As most of the units are fired by gas, higher use may boost imports of LNG, prices of which have also surged. Such a situation could add to their costs as domestic supplies are scarce.
Still, the refineries may not be the first to suffer from lack of grid power. Some independent downstream industries such as plastics, fibers and synthetic rubber could see some rationing in the event of an electricity shortage. Although they are seen as non-critical industries, there could be a ripple effect on packaging materials to vehicle tires.
The manufacturing units are usually small and don’t have their own power units. To avoid any shutdowns, they could use diesel generators. However, prices of the fuel, which is also used to run trucks and operate industrial machinery, are near record levels and a runaway increase in its use could boost prices further, having a sweeping impact on the economy.
Although many primary steel producers have their own power plants, they are paying more than four times the normal cost for procuring coal in auctions, according to V.R. Sharma, managing director of Jindal Steel & Power Ltd. There has been no impact on production yet as the units have adequate supplies and are unlikely to curtail output, he said.
The smaller mills, which account for over half of India’s steelmaking capacity, use electricity supplied by energy producers for their smelting operations and long outages could mean production cuts and lower supplies to customers.
“Integrated secondary steel mills or standalone sponge iron producers may have to face production cuts as they rely on non-coking coal to run operations," according to Jayanta Roy, senior vice president at ICRA Ltd.
Aluminum makers are among other major coal users that may be forced to choose between shutting down operations or running their plants at much higher costs, using imported or auctioned domestic coal. For aluminum, electricity accounts for almost 40% of the production cost.
The acute coal crunch has created a “precarious situation" for aluminum producers as stockpiles of the fuel have plummeted to critical levels, the Federation of Indian Mineral Industries said. While aluminum output hasn’t been affected so far, there may be production cuts by the end of the month if coal supplies don’t recover, it said.
With enough stockpiles for only one to two days, power plants at aluminum factories are being forced to reduce generation and face a “huge risk" of shutdowns, it said.
A power cut of more than two hours can cause the molten metal in the potline to become solid, forcing the smelting unit to shut down for at least six months, according to the Aluminium Association of India.
The most vulnerable sectors are those that require refrigeration, such as poultry, meat and dairy. With grid electricity supplies being unpredictable, most of the units keep diesel power generators as a back-up. A serious power crunch could inflate their costs and hit profits.
Another sector that could be impacted is brick kiln makers, who mostly use solid fuels such as coal and biomass. The producers have been buying a lot of imported coal in the past years, but with seaborne prices surging to near-record levels, they would be joining the queue for domestic coal, crowding out that market further.
In contrast, sugar manufacturers aren’t anticipating any energy problems as the mills in the world’s second-biggest producer generate their own power from bagasse, a byproduct of sugar cane, according to Abinash Verma, director general of the Indian Sugar Mills Association. They even supply surplus power to the grid, he said. The new cane crushing season will begin later this month.
The vegetable oil industry is also not concerned. “As of now, it’s business as usual. There’s no impact from the electricity crunch," said B.V. Mehta, executive director of the Solvent Extractors’ Association of India. Many mills have back-up generators and they can manage in the event of any shortage, according to some industry officials.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.
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