Jump in imported coal prices to impact Indian firms

Prices of imported coal in India are heading northwards. If things move the way it has been moving now, prices are poised to move up by nearly 45-55 per cent Q-o-Q in Q1 FY23 as markets face supply disruption following the Russia-Ukraine conflict. Some time back, the Union Ministry of Power (MoP) had advised state power generation companies (GENCOs) and independent power producers (IPPs) to meet their coal requirements through blending of imported coal to the extent of 4 per cent.

At this outset, the Ministry of Power (MoP) on March 26, issued an advisory highlighting a) domestic coal supply availability to power sector to be done in proportionate basis of the coal received from Coal India Limited / Singareni Collieries Company Limited (SCCL), b) direction to maximize the captive coal production within the permitted levels and c) initiatives to promote the use of renewable energy so as to bring down coal dependency.

These moves assume significance in the wake of the fact that given the continued tight domestic coal supply position over the last six-month period, coal import dependency for the power sector is expected to increase moderately in the near term.

Interestingly, in terms of coal import dependency for the power sector, the share of coal imports in overall coal requirements for the power sector has declined to nearly 4 per cent in 11M FY2022 against that of close to 8 per cent in FY2021, amid the increase in international coal price level by more than 140 per cent over the last 12-month period (Indonesian coal price index) and challenges faced by IPPs to pass on the fuel price cost increase to the distribution utilities (Discoms) under the PPAs. With a sharp increase in coal price levels internationally over the past 12 months, the variable cost of generation for imported coal based power projects is estimated to have increased by more than Rs 3 per unit between March 2021 and March 2022. Amidst all these, one has to keep in mind that Russia is a key supplier of coal in the seaborne market, accounting for nearly 17 per cent and close to 10 per cent of the international trade in thermal coal and coking coal respectively. With SWIFT sanctions imposed on some Russian banks and concerns over counterparty credit risks, buyers are unable to trade with Russian coal suppliers. Besides, a growing number of Western power utilities are also looking to voluntarily place an embargo on Russian coal supplies, which is leading to disruptions in the normal coal trade flows.

The elevated prices notwithstanding, supplies from non-Russian sources are unlikely to fully compensate for the shortages in Russian supplies as Indian miners have limited spare capacity to ramp-up production. As coal supplies remained tight, domestic spot e-auction premiums for auctions conducted by Coal India Limited reached all-time highs, climbing sharply to 270 per cent in February 2022 as against 30 per cent in February 2021.