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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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Demand from India Reshaping the Global Coal Market

Attention international coal industry. There's a new kid on the block.

The nation of India.

India is emerging as a major re-shaping force for the global coal market. With in-country coal supplies flagging, Indian buyers are increasingly turning to imports to meet demand.

The situation at many of the nation's power plants is dire. The federal Central Electricity Authority monitors coal stockpiles at 79 plants throughout India. As of yesterday, 19 of those plants (25%) were running at "critical" levels, with less than 7 days worth of coal on hand.

In fact, 9 of those plants are operating with less than 4 days of coal supply. Meaning that 11% of national generating capacity is teetering on the edge of shutdown. These plants are completely reliant on new coal deliveries. If coal shipping is disrupted for any reason, there's no back-up.

There are a few factors at play here. Firstly, India's coal production is lagging demand. Due to fixed government pricing that makes it difficult for coal miners to turn a profit. There's simply not much economic incentive to build new mines (although the government is trying to horse-whip producers into increasing output, even at low prices.)

The other problem is that India's coal-producing regions are distant from many of the electricity demand centers, especially along the coast. Bottlenecks in rail transport make it difficult to get coal to many of the power plants that need supply most.

A clear solution seems to be emerging amongst many of India's biggest coal buyers. Go international.

Yesterday, Maharashtra State Power Generation Co. (the firm that supplies power to Mumbai, among other places) announced it will seek to import 3.35 million tons of thermal coal in the year beginning April 1.

This is a big jump in Maharashtra's foreign coal use. Up 40% from the 2.4 million tons imported in the year ended March 31.

The company's managing director Subrat Ratho made it clear this is a decision coming from the highest levels in India. As he noted, "We would like to import as little as we can because overseas coal is six-times more expensive than Indian coal. But it appears the Ministry of Power has made an assessment of how much coal the domestic companies will be able to supply to various states and have given us this target."

The decision is changing the face of coal imports across the country. India's thermal coal imports surged 100% in 2009, to 60 million tons. Up from just 30 million tons in 2008.

With India's focus now shifting to coal imports, a question is arising. Where will this international supply come from?

Nations like China and Japan have been competing hard for years to secure coal supplies in many of the world's richest regions like Indonesia and Australia. Being late to the party, India is now making its own push to capture supplies. By going forth and buying mines.

Last year, the Indian government gave explicit instructions to many of the nation's largest coal companies to buy overseas coal mines in the interest of nailing down import supply.

One such acquisition materialized this week, with major coal miner and power plant operator Essar Group announcing its purchase of the Aries coal mine in East Kalimantan, Indonesia. The project is reported to hold 100 million tons of thermal coal.

This follows on the heels of Essar's recently-announced $600 million purchase of West Virginia's Trinity Coal Corp. Signaling that Essar (and other groups like it) are moving fast to secure coal assets globally.

The coal industry is already a crowded space, with several nations competing for imports and to buy mines. The sudden addition of an aggressive and deep-pocketed buyer like India could end up being like trying to drive a bulldozer through a mousehole. Putting upward pressure on both coal trade prices and the price tag for purchasing deposits.

We saw this movie once before in 2005 when China turned from a net exporter of coal to a net importer. Prices soared and coal producers had a great run in the stock market.

India may be the only other nation on the planet with the ability to do same.

By. Dave Forest of Notela Resources




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