Coal imports into India: Where is All the Coal Going?

BRISBANE, Australia - Sept. 6, 2013 - PRLog -- Whichever way you look at it, the numbers don’t fully add up.

Coal imports into India are soaring. Data compiled from reports provided by Indian customs show that imports have increased 69% in April – July over the same period last year. That’s an increase of 14mt in the first four months of the fiscal year over the same period last year.

Based on this data, the annualized thermal coal imports for this fiscal year could increase about 53mt relative to last year, assuming the same purchase trends as last year.

Imports numbers based on shipping data vary slightly but confirm the same rapid increase. Several media reports citing Interocean Group, a shipper based in New Delhi, said that imports had increased 48% in June. Despite the variations in actual imports across the data sources, the overall trend of import growth is unmistakable.

Thermal imports surging by 50mt over a year isn’t the real surprise. Even the government was projecting such increases but drawn out over a longer period of time. The recent import surge simply suggests that those projections will be realized sooner than anticipated.

The real puzzle in the import growth is the absence of other fundamentals that corroborate the increase of that magnitude.

Since the start of the fiscal year, 1 April, the Indian currency has lost about 13% of value depreciating from Indian Rupees (INR) 54 against US$1 to INR 61 against a dollar on 12 August. The increase in imports has occurred against this currency devaluation and even as US$ denominated prices have remained steady. In fact, benchmark dollar denominated prices have tugged up marginally over the last few months.  

The currency devaluation remains a key concern for Indian policy makers. Government appears to be determined to further slow erosion of the currency. The finance minister is trying to slow down gold imports. The well respected Raghuram Rajan, who is currently the government’s economic adviser and was previously IMF’s chief economist, has been appointed Governor of the Reserve Bank of India, the central bank. The hope, of course, is that the new Governor will reverse the currency slide.

The market sentiment is that somehow the currency slide will stop or slow down. The surge in imports appears to have little to do with traders trying to lock in any potential arbitrage from future currency devaluation.

Although Coal India Limited (CIL) missed its first quarter (April – June) production target and continues to struggle to meet its supply commitments, the overall tightness in domestic coal markets has loosened. Electricity demand growth has been lower than anticipated on account of the sluggish economic growth, which has remained stubbornly stagnant with no immediate signs of acceleration.

One visible sign of the slack domestic coal market is the burgeoning stock at power plants. In early August, coal stock at power plants had risen to 22mt. At the end of July last year, coal stocks at power plants were at 10mt.  

In the first quarter, CIL had met approximately 90% of the committed supply level. Increased availability of rakes for transport, a key bottleneck of the past, has helped. This could be partly the result of the economic slowdown, which helps demand for freight. It could also be the continued ban on iron ore production and exports in several states, which has subsequently reduced the demand for rail rakes, thereby making it available for coal.

The growing coal stock is forcing many, particularly state owned power generation companies, to ask CIL to slow down supply to their plants. Utilities in West Bengal, Tamil Nadu and Gujarat were asking CIL to restrict supplies.

CIL, which receives a bonus for supplying beyond a threshold level, isn’t likely to slow down quite so easily. It’s earning are already under pressure, having declined 16% in the first quarter of this fiscal year. Every bit of extra revenue will help. The company is already behind on its production target. These targets, unfortunately, are not pegged to demand. The company will continue to mine and supply despite protests from some customers.  

A strong monsoon, which arrived earlier than expected in North India, pushed up generation from hydro-electricity, thus easing the pressure on thermal power plants. Hydro generation was up 6% over the first quarter, relative to the same period last year, to 31 billion kWh.

While many of the state owned power generation companies have adequate domestic stock, private sector owned power generation companies still have difficulty selling imported coal based power.  

Outside of the power sector, there’s little sign of life that suggests booming coal demand. The index of industrial production, which provides a keenly watched measure of real physical activity in six industrial sectors, declined for the second straight month in June, falling 2.2%.  

Although the coal importers are listed, the final buyers of these imports are not exactly clear yet. There have been no large bulk tender calls from power generation companies. NTPC, the country’s power generation company, has yet to place any substantial amount of the close to 20mt of annual imports it requires to tender. CIL is reportedly preparing its first tender call for 5mt.

Perhaps imported coal is being stocked in anticipation of the surge in electricity demand as the election nears. State owned power utilities will be under pressure to keep the lights on at all costs closer to the election. That may one hypothesis.

But there must be another better explanation as well.

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