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How India’s crippling coal shortage will play out

As of February, around 52% of power producing capacity in India used coal as the fuel. As of 1 April, the levels of coal stocks at 80 power plants in the country were in a critical situation.Premium
As of February, around 52% of power producing capacity in India used coal as the fuel. As of 1 April, the levels of coal stocks at 80 power plants in the country were in a critical situation.

  • The demand for coal has increased at a much faster pace than the domestic industry, led by Coal India, can meet
  • The imported price of coal has shot up massively because of supply disruptions resulting from the Ukraine war. This led to a fall in imports, leading to the coal shortage.

MUMBAI : Russia’s attack on Ukraine has led to global commodity prices soaring, primarily because the country is a large exporter of commodities. It is the largest exporter of natural gas, fertilizers and wheat. It’s the second largest exporter of oil after Saudi Arabia. And when it comes to coal, it is the third largest exporter globally.

The supply of these commodities has been negatively impacted. This includes coal with the prices going up big time. In the process, countries which import a substantial part of the coal they consume have ended up with a problem, including India. Coal stocks at power plants across the country are down majorly. As of February, around 52% of power producing capacity in the country used coal as the fuel.

Coal Conundrum
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Coal Conundrum

A spate of news-reports across the media are reporting the coal shortage. The Indian Express reported on 20 April that the various thermal plants in Punjab and Haryana had only a few days of coal left. A Karnataka bureaucrat told CNBC that the state had only two days of coal supplies left in its thermal power plants. A Press Trust of India news report quotes the All-India Power Engineers Federation as saying: “many [power plants]… are not able to bridge the gap between demand and supply because of insufficient coal stocks at thermal plants."

The insufficient stocks of coal are reflected in data released regularly by the National Power Portal (NPP), which tracks the coal stocks at thermal power plants across the country. As of 21 April, the thermal power plants across the country had a total stock of 21.9 million tonnes (mt) of coal. The daily usage of coal at these plants stood at 2.7 mt. This basically means that the power plants have enough coal for eight days. This is much better than the stock of four to five days that these plants held in October but significantly lower than their long-term average in April.

As Sonal Varma and Aurodeep Nandi of Nomura write in a recent research note dated 17 April, the current stock is “much lower than the average stock of 17 days held in April over the last five years". In fact, NPP data suggests that the stock levels in 108 out of the 173 power plants are at critical levels. As of 1 April, the stock levels at 80 power plants were in a critical situation. This tells us how quickly the situation has deteriorated, with many more plants having low levels of stock. The stock level at a thermal power plant is deemed to be critical if coal stock is less than 25% of normative coal stock. Clearly, there is a problem. The question is how did we get to this state. In this piece we try and examine the reasons.

India’s coal imports

Coal is India’s most abundant fossil fuel. As of 1 April 2020, the total geological reserves of coal in India stood at a little over 344 billion tonnes. As the annual report of Coal India for 2020-21 points out: “At the current rate of production, the reserves are adequate to meet the demand for multiple centuries to follow."

But despite these huge underground coal reserves, India continues to import a substantial amount of coal that it consumes. Take a look at Chart 1. It plots the total coal production in the country along with total imports, over the years.

Chart 1 clearly shows that over the years, both domestic coal production and imports have risen. However, it doesn’t clearly show us something more important: coal imports have risen at a much faster pace than domestic coal production. Take a look at Chart 2. It plots the proportion of imports in the overall coal consumption. The overall coal consumption is obtained by adding domestic production to coal imports.

Chart 2 makes for a fairly interesting reading. More than two decades back in 2000-01, coal imports formed just 6.9% of the overall coal consumption. Over the years, they have increased to around one-fourth of the overall coal consumption, peaking in 2014-15 at 26.1%. In 2021-22, for the period from April 2021 to February 2022, coal imports made for around 21.7% of the overall coal consumption during the period.

Why has this happened?

A major reason for this lies in the increase in the coal-based thermal power producing capacity. As of March 2001, the total installed capacity of these plants had stood at 60,935 MW. By February 2022, this had gone up to 235,929 MW, an increase of close to 300%. This works out to an annual increase of 6.7%. In comparison, the coal production within the country has increased at the rate of 4.4% per year.

Now coal isn’t just used to for producing electricity. It is also used for manufacturing steel and cement, among other things. The production of finished steel (alloy and non-alloy) has gone up from 29.3 mt in 2000-01 to 113.6 mt in 2021-22. The production of cement is also expected to go up to 379 mt in 2021-22.

This has led to a much faster increase in demand for coal than the domestic industry, primarily led by Coal India, which produces more than 80% of the total coal produced domestically, has been able to keep pace with. Hence, the increase in coal imports.

As mentioned earlier, in 2021-22, the imports stood at 21.7% of the overall coal consumption. For a period of eight years before 2021-22, close to a fourth of the coal consumed was imported. And this is where the problem lies.

The imports in 2021-22 (April 2021 to February 2022) have come down. They had stood at 198.9 mt during April 2020 to February 2021. They came down by 5% during April 2021 to February 2022 to 188.8 mt. This was primarily on account of coal prices going up dramatically, making coal imports unviable.

Take a look at Chart 3 which plots the average monthly price at which coal has been imported over the last 10 years starting January 2012 onwards.

As per chart 3, the average imported coal price from April 2021 to February 2022 has stood at $143.8 per tonne, double the price of $73 per tonne between April 2020 and February 2021.

Also, the price of imported coal has been greater than $200 per tonne from November 2021 onwards, which is the highest since January 1992, the period from which data is available on the Centre for Monitoring Indian Economy database.

At such high prices, no wonder imports have come down by 5% from April 2021 to February 2021, the first 11 months of the last financial year. Nonetheless, this doesn’t tell us the gravity of the situation. In fact, if we look at coal imports from November 2021 to February 2022, the period during which prices crossed $200 per tonne, we can really understand how dire the situation is.

The overall coal imports during the period stood at 56.2 mt. This was down by a third in comparison to the period between November 2020 and February 2021, when coal prices were much lower and the imports had stood at 84.3 mt.

The average imported price of coal from November 2021 to February 2022 was around $211 per tonne (a simple average of different prices across months). From November 2020 to February 2021, the average price was $75.4 per tonne (again, a simple average).

This massive jump in price has led to a fall in imports and that has led to a coal shortage at power plants, where stocks are down to eight days. Along with this, as Varma and Nandi say, the domestic “supply has been disrupted due to the reduced availability of railway rakes to transport coal".

At the same time, there has been increase in the demand for electricity as the economy has recovered, offices have started to open up and the early onset of summer has led to an increased usage of air conditioners, fans, coolers and refrigeration. During a period of 15 days ending 10 April, the demand for electricity went up by 9.5% in comparison to the same period in 2021.

How do we solve this?

Given that coal imports have become expensive, the only way to ensure that the coal shortage does not continue is to ramp up domestic production. The monthly domestic production of coal peaks in March every year. This is primarily because Coal India, which produces a bulk of the domestic coal, ups the ante to meet its annual production target.

Post this jump, the coal production in April automatically slows down.

The explanation for this phenomenon probably lies in the fact that any system used to producing a certain amount of monthly coal can only be stretched now and then.

A look at data between 2013 and 2021 tells us that on an average, Coal India produced 67.5 mt of coal in March. In April, the average production was 40.6 mt or only around three-fifths of the production level in March.

Now lest we be accused of hiding behind averages, it is important to point that this ratio has been falling over the years. It was at 66% in 2013, when production in April was 66% of that in March. It peaked at around 72% in 2015 and was at around 52% in 2021.

Now take a look at Chart 4 which plots the monthly production of Coal India from 2013 onwards. What does Chart 4 tell us? It tells us that Coal India production peaks in March, falls dramatically in April, then rises slowly over the next few months and then rises at a fast pace and peaks again in March.

The reason for belabouring on this point is that we are in the month of April and the country is short of coal. Clearly, looking at the past tells us that Coal India is not in a position to ramp up production quickly. Of the 777.3 mt of coal that was domestically produced in 2021-22, Coal India produced 623 mt or around 80% of the coal produced domestically.

Interestingly, Coal India has said that it has ramped up production to 26.4 mt in the first half of April. This is a growth of 27% with respect to the same period during 2021. Nonetheless, even if the company maintains this pace and ends up producing 53 mt of coal by the end of this month, it will be much lower than the 80.3 mt of coal that it produced in March. Essentially, April is a lean month when it comes to domestic coal production.

So, what option does that leave us with? Coal India has long-term contracts which it fulfils at the prices at which it had entered those contracts. The remaining coal is sold through electronic auctions.

With states running short of coal, the chances of this coal being diverted to them are very high. This will mean that industries which need coal and have no long-term contracts in place would have to depend on imported coal.

As Varma and Nandi of Nomura put it: “This would result in more power outages in summer and a diversion of coal away from non-power sectors (e.g., aluminium, cement, steel), weighing on industrial output and increasing electricity costs. This could become another stagflationary shock." The word stagflation is a combination of stagnation and inflation and typically refers to an environment of high inflation and slow economic growth. Some of this shock can be lessened if railway rakes can be made available quickly.

And if you do not live in the metros, the summers could end up being more sweaty. In fact, that is already happening.

A recent Bloomberg news report pointed out: “A surge in demand for electricity has prompted states including Punjab and Uttar Pradesh… and Andhra Pradesh…to cut off supply. The disruption, as long as eight hours in some places."

The load-shedding is coming!

Vivek Kaul is the author of Bad Money.

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