Election Year Coal Demand Expected to Increase in India

BRISBANE, Australia - April 10, 2013 - PRLog -- Welcome to coal demand in election year, where there is always a little bit of good and a little bit of bad.

The election season hasn't really begun. But if all of those long-winded rhetorical speeches in parliament during the recent budget session were any indication, the election was on every mind.

Elections should similarly be on the mind of every miner seeking to sell into Indian markets. The coming financial year could be a dream run for imported coal into India. The right set of factors are beginning to align.

First, of course, are the looming elections. Nobody knows when exactly that will be, though it can't be later than next summer. A key regional ally walked out of the coalition at the centre last week, leaving the government wounded but not out. Government has promised to trot on to the full finish line of the term.

Electricity is a key commodity during the election season. Distribution utilities will be under tremendous political pressure to keep the lights burning, particularly to residential and agricultural areas.

These distribution utilities are already short about 20% on energy. To meet the entire load and some latent demand that will invariably surface, distribution utilities will have to make up the difference by either buying from the short-term markets or pushing harder on their long-term markets.

Power markets witnessed similar stress five years ago in the run to the last general election held over April – May 2009. Short-term prices at that time routinely averaged Rs8/kWh (about US$150/MWh). Maximum prices often reached Rs15/kWh (about $275/MWh) during the actual months of the elections.

Equally importantly, the price spread between over-the-counter and exchange based purchases increased, with power exchanges posting much higher prices as distribution utilities found it easier to skirt their internal purchase control requirements by going through the exchanges.

Power prices crashed spectacularly shortly after the elections. The spread between over-the-counter and exchange prices also narrowed, with over-the-counter transactions often posting much higher prices (products in over-the-counter and the exchanges are not identical). Not all of the price crash in electricity markets may have come from the end of the elections, but it certainly had a large bearing.

This time too, there will be pressure to keep the lights burning but the situation is somewhat different. Distribution utilities are less flush with cash. Their operating credit is tapped out. Their ability to purchase from the exchanges will be limited unless they can pay up immediately.

Over the next few months, many of the state-owned distribution utilities are likely to adopt the financial restructuring package that was approved by the Indian Government earlier this year. This package shifts half of the utilities debt into state government backed bonds, while the other half is.

to be restructured with the lender. Though this will free up the balance sheet of the utilities, their wiggle room will still remain limited.

Under these circumstances, distribution utilities are likely to lean more heavily on over-the-counter purchases and through generators with whom they have long-term purchase agreements. Credit terms for utilities with these long-term contracted generators will be slightly more favourable than the exchanges will be able offer (or maybe utilities can bully them around more easily).

Although there is a bit of idle gas capacity, coal will be the go to guy. This will mean a surge in coal demand. But sourcing that coal will be the bigger challenge.

Domestic coal production from Coal India and other producers will continue to remain tight. Having already dipped into existing inventories this year – CIL is likely to end the year with 40Mt of stock, about half of what it started with – it is likely to focus on producing and dispatching.

Imports will be required to meet the surge in demand.


Much of the purchases are likely to be through opportunistic buying. Distribution utilities are not yet in a stable financial position to underwrite the purchase with any meaningful contracts. Plants will look to suppliers that can sell to them at short notice and with creative payment terms (or at least allow the payment risk of the utility to flow down).

The story of imported coal surge in the election year may be about a few dominant buyers that will lock up low international prices, manage stock domestically and sell opportunistically in smaller packets across the country.

That's the tricky thing about election year demand – there's always a bit of good and bad. The good is that there's plenty of demand. The bad is figuring out how to profit from it.

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