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Two Bullish Missed Targets in Coal ... and One Place that will Benefit

The opportunity in Asian coal continues to grow brighter. Evidenced by two important pieces of data this week from major consuming nation India.

Coal India—the nation’s largest coal miner—reported that its coal production has once again fallen short of target.

The firm said that production for the nine months from April to December 2013 came in 15 million tonnes below forecast. Totaling just 335 million tonnes.

The company also missed its sales target for the same period. With sales falling 12 million tonnes short of the targeted 354 million tonnes.

The underperformance is expected to continue for the rest of the fiscal year (which runs until March 31, 2014). Total mined coal output will likely come in 17 to 18 million tonnes below targets for the year.

A Continuing Crisis Gets Worse

These missed targets are yet more evidence that India’s domestic coal production is in big trouble.

Since 2010 Coal India’s production has fallen well short of its supply commitments to domestic power users. Hampered by a lack of infrastructure and chronic environmental hang-ups over new projects (the company cited two expansion bans from the national environment ministry as reasons for its latest production shortfall).

Production v Supply
Source: Press Bureau of India (December 9, 2013)

At the same time, coal demand from India’s power sector is soaring. Total daily requirements are running at 1.4 million tonnes.

Finding that supply is proving difficult. A full 19% of the country’s coal-fired plants are running at “super critical” coal supply levels, with less than 4 days of inventory on hand. An additional 7% are at “critical”, with less than 7 days of inventory. Meaning that over a quarter of total generating capacity is facing potential disruptions in coal supply.

Status of Coal at India's Power Plants
Source: Central Electricity Authority, Government of India (January 6, 2014)

India has only one option to fill the gap between rising demand and falling production.

Imports.

The drive to import more coal shows in recent data. India’s thermal coal imports rose 83% in fiscal year 2012/13 (April 2012 to March 2013), as compared to fiscal year 2010/11. For a total increase of over 40 million tonnes.  

Recent numbers show that imports for the current fiscal year so far total just under 93 million tonnes. Annualized, that suggests total imports through to March 2014 of around 139 million tonnes. Which would represent an amazing 56% increase over last fiscal year.

Coal Fields In This Established Producing Nation Will Benefit

Here’s the biggest concern for Indian coal buyers. There aren’t a lot of major coal producing countries with the right geography to provide imports. In fact, only three: Australia, Indonesia, and South Africa.

South Africa is by far the most attractive in terms of ramping up supply to feed India’s demand.

South African coal output is low-cost. With numerous mines here producing for $20 to $40 per tonne—making this one of the most economic production centers on the planet.

Shipping costs to India are competitive with Indonesia. And the country has significant excess reserves to be developed. One of the most interesting areas being the Waterberg coal field of northern South Africa—estimated to hold some 50 billion tonnes of coal. Development in the Waterberg is just beginning, and infrastructure is still a challenge. But if road and rail gets built to move coal to port on the eastern coast, these supplies are well-positioned for export to India.

Investors can participate through direct ownership of coal mines with export potential in both the Mpumalanga and Waterberg basins. Exxaro Resources (OTC: EXXAY) is the only significant producer positioned in both plays, and investment in shares of the firm also provide potential exposure to growing Indian coal demand.

Earlier-stage project development opportunities lie in nearby Madagascar, in the Sakoa coal fields. Thailand’s PTT is spearheading development in this new production center. Lemur Resources (ASX: LMR)—now owned 54% by Bushveld Minerals (LON: BMN)—also holds advanced development projects here.

Track data on “India Coal Critical”

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