Gas Price Hike to Bring in more Imported Coal to India

BRISBANE, Australia - July 28, 2013 - PRLog -- Industry analysts argue that power sector companies in the country which are already reeling under a severe economic crisis will be in more trouble as they will find it difficult to sell the costly power produced out of gas to the distribution companies.

“Already they are under severe economic stress. So how do you expect them to sell the costly power to distribution companies? So essentially this has to increase the volume of imported coal many folds in the near future to manage the situation,” a power sector analyst said.

The analyst felt that power generation from imported coal at the prevailing prices in the international market will be much cheaper.

Recently the government endorsed a proposal by the Cabinet Committee on Economic Affairs (CCEA) to double the price of domestically produced natural gas from $4.2/million British Thermal Units (MMBtu) to $8.4/MMBtu. This is the price gas producers will receive for what they sell. With taxes, pipeline transportation and marketing costs, delivered prices to consumers under the new pricing guidelines will exceed $10/MMBtu in all of the states.

The new dollar-based pricing formula will come into effect from April 1, 2014 and will remain in effect for five years.

These guidelines will apply to almost all of the domestically produced gas, except for about 13% of the production where the contract already provides a specific formula for price indexation.

The petroleum ministry believed that the country could not survive if it were to import petroleum products worth $135b a year and the recent price hike will control the foreign flow of capital and mitigate the current account deficit (CAD) to a great extend.

The situation, however, will remain much the same on the CAD front, felt another analyst, while he foresaw an increased share of imported coal in Indian market.  

“A power starved country would definitely want to produce and sell more power in the market economically. So with an increase in gas prices distribution companies will definitely prefer cheaper electricity produced from coal and you don’t have sufficient domestic coal to cater to their needs. In that situation you will import more coal and the foreign outflow of funds will be almost the same,” the analyst said.

However, an industrial observer predicts a complex situation arising out the entire chain of events. While he is in agreement that the current situation will only promote the use of imported coal he feels that the situation would still depend on several other factors.

“For now it will look that in all probability imports can only go up on this account. And it will definitely go up. But you can’t assume that coal prices in the international market will remain the same forever,” Mr Jain said.

An industry insider, however, rules out prices going up drastically in the immediate future.

“China is close to banning low cv coal from Indonesia. So there will be enough material for India. So any worry on that front is out of place. Prices will be stable. But considering the share of gas-based power generation in India, I don’t think the gas price will have a tremendous impact on coal imports,” a key official from the State Trading Corporation (STC) said.

India has about 20,000MW gas-based power generation which is about 10% the country’s total installed capacity.

The official said that in the previous financial year the STC imported about 9mt of thermal coal for its consumers. The company would be importing about 10mt this year, he said.

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