Supply constraint: India Inc has no option but to import coal
Indonesian government has circulated a draft decree among coal producers suggesting a ban of exports of coal below calorific value of 5100 kcal/kg, starting from 2014. This could cut thermal coal exports by 120-130 million tonnes. One of the biggest hits will be India which prefers Indonesian coal for its low sulphur content and competitive price. Indian companies have a strong appetite for low calorific value coal from Indonesia. The calorific content that India imports is below 5,000 kcal/kg and can be as low as 3,500 kcal/kg.
Indonesia is getting weary about allowing very heavy exports for valid reasons. Indonesian coal exports grew to 270 million tones in 2010, but their own domestic power producers’ demand for coal will keep growing. So now Indonesia will set aside 82 million tonne or one fourth of 2012 production for domestic players. And it will tighten its grip on coal exports.
What this means for India is more tightening on coal supply for a country that already has ambitious targets for power capacity addition but no coal. India wants to add 14 GW of power capacity in 2011-12. In 2010-11 the state target was 13 GW while 9 GW was added. Even to add 9 GW next year, we need 40 mt of additional import. The next 5 year plan proposes to add 100 GW in the next 5 year plan which is not achievable going by the logistical issues the country faces.
Firstpost caught up with James O’ Connell, managing editor, and Michael Cooper, associate Editor, International Coal Report, Platts, to get perspectives on Indian coal situation and what could be the way forward.
Q. What according to you is the biggest challenge for India in improving its coal supply?
A. The biggest problem with India is obviously the mismatch between demand and supply of coal. We think India still underestimates its problems. The biggest hindrance in improving coal supply is infrastructure. And we are not talking only about the railways. If you look at new power plants, they are all closer to the coasts because of lack of railways. But the big issue is also the ports. India spent only 6.5 percent of its GDP on infrastructure in 2009 while a country like China spent 11 percent. Indian ports cannot take capsize vessels which carry more cargo (can get only panamax freight: which are smaller and expensive) and reduce the cost. Moreover the average time taken by ships to load/unload at India ports is almost 96 hours, 10 times longer than in Hong Kong.
Q. Even if we import high quality coal from abroad, are Indian players ready to use it?
A. Yes. Private players like Adani or GVK or Lanco have good technology and they are showing the way. The most important way forward for India would be to get ready for more imports. The Adani group is investing $1.2 billion in the Mundra Port and Special Economic Zone over next five years. Australian Bureau of Agricultural and Resource Economics’ forecast (Abare) says India imported 60 mt for 2010. They estimate this number will be 77 mt in 2011 and 92 mt in 2012. India might even beat China in imports in next 2-3 years. India should better get prepared for it if they have to meet the power production targets.
Q. Is getting coal from abroad the only way forward? I ask this because Indonesia has imposed export duty. Now they are talking of partial ban of exports. Tomorrow other countries can do that too. So is getting mines abroad less to do with pricing power and more to do with supply?
A. You know, it is a bit of both, but yes, more to do with supply. Integration of raw material is what all private players are looking at. And if the company can secure coal, washing capacity for coal, vessels for freight and power plant, of course cost of production will improve. One can save $60-80 per tonne only by controlling the vessels.
But I guess you are right. It is more to do with securing supply. If Coal India cannot supply adequate coal, the private companies can at least sell the coal from their mine abroad. That acts as a shield against their exposure to spot pricing in India, this is known as hedging. In fact, this exposure to volatility of spot pricing is the biggest problem for Indian power producers. Getting mines abroad is the only option in that case.
But I guess you are right. It is more to do with securing supply. If Coal India cannot supply adequate coal, the private companies can at least sell the coal from their mine abroad. That acts as a shield against their exposure to spot pricing in India, this is known as hedging. In fact, this exposure to volatility of spot pricing is the biggest problem for Indian power producers. Getting mines abroad is the only option in that case.
But they must look at countries other than Indonesia, like South Africa, Columbia, Mozambique. Diversifying the choice always helps. South Africa also has problems like railways is not developed enough. But private players can come together to play better role. Like Adani and GVK’s through the Hancock deal has come together in Galilee Basin in Australia. So they can come together to improve the infrastructure there for common use.
Q. Finally, how do you assess the role of Coal India and government in ensuring better supply of coal in India. After all, Coal India is almost a monopoly of coal in India. How can they share the responsibility to secure more coal?
A. Coal India needs to improve everywhere: both in terms of production and administration. They need better technology to improve production. It produced 389 mt in financial year 2011 while it had produced 395 mt in 2010. It is starting to miss production targets. It had registrations for 721 mt of coal for year ending March 2012, far more than what it can produce. It needs to wash more coal as on an average washing coal would add about 500 kcal/kg. So this is the technology part.
On administrative part, things need to move much faster. India needs more coordination between different departments of government. For example, the shipping and coal ministry can come together to improve ports. That coordination is lacking. Even policy decisions have to be faster which includes environmental clearances, land etc.
Decision making has to be much faster. Coal India had floated tenders for 10 year off-take tender. It attracted 27 offers from 15 countries. But look at it practically. Coal India wants a discount over market prices which no one is ready to give. It has been sitting on so much cash for so long. If they cannot get coal supply immediately, it will be really bad news for Indian domestic power players.
On administrative part, things need to move much faster. India needs more coordination between different departments of government. For example, the shipping and coal ministry can come together to improve ports. That coordination is lacking. Even policy decisions have to be faster which includes environmental clearances, land etc.
Decision making has to be much faster. Coal India had floated tenders for 10 year off-take tender. It attracted 27 offers from 15 countries. But look at it practically. Coal India wants a discount over market prices which no one is ready to give. It has been sitting on so much cash for so long. If they cannot get coal supply immediately, it will be really bad news for Indian domestic power players.
-Umesh Shanmugam
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