Rising cost of imported coal may impact power tariffs

Global coal prices, which were trading at a lower range in the first half of the current financial year, are likely to see a spurt in the second half, likely having an impact on domestic e-auction prices of the fuel as well.

However, Coal India may still not revise the prices up through the year, analysts said. The state-run company may come under greater pressure to scale up output to mitigate the effect of higher prices of imported coal on the power companies and electricity tariffs to the consumers.

India meets over a fifth of its coal consumption via imports, and the import bill stood at close to Rs 3.9 trillion last year. Sales via e-auction is roughly 15% of domestic coal market.

The likely rise in imported coal prices is owing to the increase in the demand for the fuel ahead of the winter season, which is coupled with a supply crunch.

Average price of imported coal from Indonesia to the country increased to $60.3 per tonne in October from $53.5 in September. In the domestic market, coal sold under the e-auctions are being traded in the range of around Rs 3,200 per tonne compared to Rs 4,800 per tonne last year.

“(Imported coal) prices can increase anywhere between $2-$10 per tonne,” said Deepak Kannan, Global Head of Coal Pricing, S&P Global Commodity Insights. “Usually there are seasonal rains in Indonesia, a key supplier of coal in the Asian market, starting from October which may impact coal production and hence cause prices to increase.”

Additionally, countries like China, Korea, and Taiwan are gearing up for winter stocking which may further hit coal supply in the Asian markets. As far as India is concerned, with the monsoon season now ended, it needs to re-stock coal at its power plants, analysts believe.

Global coal prices fell in the early half of the financial year 2023-24 due to ample supply and the big premium for Australian coal which narrowed following the easing of disruptive La Niña weather that had hampered production, according to the International Energy Agency.

“The price of 10-15% of portion of coal which is sold under e-auction may increase if there is a rise in international prices,” said Partha S. Bhattacharya, former Chairman and Managing Director of Coal India Ltd.

However, experts do not see any revision in the domestic coal prices set by Coal India owing to its healthy growth in the previous quarters.

“Coal India may not need revising coal prices because the company is growing fast and it is able to absorb cost increases or the inflationary impact on input prices very well,” Bhattacharya said.

If coal prices remain elevated, it might pose some challenges in coal imports which are seen on the higher end in order to meet the country’s rising demand for power.

“That’s a challenge India is facing (of import of prices remaining high). We will have to continue looking at producing more,” said Sunil Chaturvedi, board member of the FutureCoal Global Alliance. “India remains exposed to that 200-250 million tonne which is coming from outside.”

In the first half of the current financial year, India has imported 120 million tonnes of coal primarily from Indonesia, Australia, South Africa, and Russia, as per data provided by S&P Global.

This concern of a price increase comes at a time when the country’s power plants are facing shortage of coal stocks, increasing India’s dependency on imports to meet its demand. As of November 18, 64 out of the total 182 monitored power plants had coal stocks at a critical level, the latest data by the Central Electricity Authority showed.

Domestic Coal Based power plants reported a total stock of 21.9 million tonne, 41% of the total normative stock requirement of 53.2 million tonne. Plants that run on imported coal also reported 42% of the normative stock requirement at just 24.2 million tonne.

The government earlier had issued directions to all power plants to import 4% of their overall coal requirement for blending with domestic coal till March 2024 to maintain stocks amid higher consumption, as per a report by Reuters.

“India cannot stop imports as a lot of plants on the coast are designed to use imported coal because of better quality,” said Alok Perti, former coal secretary. “To be able to replace it, you will have to find suitable coal, you will have to improve the quality.”

While the market wary on the country’s coal sector considering high demand for power and the need of thermal based capacity to fulfill it, experts see a bigger problem on its way – disposal of produced coal.

“Public sector companies are going to find it difficult to dispose off the coal produced as many plants will not like to use it because of its low quality,” Perti said.