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Indian import inquiries ramp up as coal supply issues hit

26 September 2017 John Howland

This is a collaborative article by John Howland and Rakesh Dubey.

India's appetite for imports continues to firm on the back of lower-than-expected availability of domestic coal and a nominal rise in coal fired electricity generation, but with prices ramping up, securing imported material is becoming more challenging.

Due to reduced domestic availability from Coal India Limited (CIL) - production is down 6% since the start of the year and power station stocks have fallen to an average of seven days of burn, the lowest level for three years - inquiries for imports have multiplied since the middle of August. And this has been amplified by an expected pick-up in industrial demand, was the consensus reached by participants at the Indian Coal Markets Conference in Kolkata, which ended 13 September.

While CIL's marketing director, S N Prasad, said at the Kolkata conference that coal supplies will likely increase in the next 10-15 days with production rising post-monsoon, market players are not convinced this will happen to the extent that will satisfy demand in the short term.

Most players believe, though, that the import surge will only last until the end of November at best, believing that CIL will be able to have brought enough supply on by them.

Inquiries gain pace

In addition to the usual imports inquiries from parties such as Essar Oil, which usually takes a Cape a month, and OVD's usual weekly Supramax for its 415 MW Chennai plant, there has been a significant uptick in inquiries from end-users that usually take domestic material.

A private generator in the east of the country, which has in recent years sourced coal from domestic e-auctions and is close to the coalfields, purchased in mid-August three cargoes of Indonesian material for delivery before the end of September. Other transactions are understood to have been completed and stock-and-sale purchases are rising.

This fall in availability to industrial consumers in particular, has seen e-auction prices surge and has already prompted non-power sector consumers to look at imports, an official of a metals company that runs 8 GW of captive power said.

The official, however, believes that the delivered price of e-auction coal is generally more economic compared to current prices of imports. Despite this, the lack of availability has meant some end-users have no option but return to the import market.

"As a result, non-power sector consumers are looking at alternatives like imported coal and petcoke," he said.

Other sources noted that Indian demand for South African coal has picked up considerably, saying demand for higher c.v. material was also acute.

One western trader said CIL would not be able to supply high c.v. coal for the next two months and with margins for sponge iron and steel makers at healthy levels, demand has surged.

The general rise in actual transactions for imported material was underlined by an inspection agency official: "My volume of imported coal inspection business has gone up and considering my share of Indian business, I think overall imports too are rising,"

India's thermal coal imports in January-July were down 15% or 15 mt year on year to 84.12 mt from 99.54 mt, according to provisional IHS Markit data.

Imports stepped up between March and May due to pre-monsoon stocking and a lull in Indonesian prices to average 14 mt per month, but were still down 0.5 mt/month on the same period last year.

Since then, imports slipped sharply in June and July to average around 10.50 mt/month, compared to 14.3 mt in same period last year, as the monsoon kicked in and as international prices firmed, partly on the back of the Indian demand.

Indonesian prices as tracked by the IHS Markit weekly markers rose to $36.50/t FOB, basis 3,800 kc GAR, on 15 September from a low of $29.82/t on 26 May, while 4,200 kc GAR prices jumped to $44.71/t FOB from $36.07/t on 19 May. However, transaction values in the 4,200 kc GAR material rose to over $46.00/t FOB by 15 September.

While inquiries have been rising, it is understood that a sizable section of private Indian power generators have not yet purchased and are waiting for a dip in imported coal prices, hoping for Chinese demand to slacken.

But those hopes may be in vain.

"It appears that Chinese demand is unlikely to taper down immediately and in that case Indian buyers will soon start booking their volumes irrespective of prices because the availability will be a big factor," one Mumbai-based trader said.

Carefully assessing

Indian imports were down largely on lower purchasing by government owned power plants that have been directed not to take imports. But these plants may have to resort to imports as their stock has slipped to critical low levels of 10 mt on 11 September from a high of around 39 mt on 4 April, 2016.

It is understood that the country's largest generator, the state-owned NTPC, is carefully assessing the situation and is reaching out to Indian suppliers/traders and readying to start import inquiries at the end of the month if CIL is unable to ramp up supply.

This would prove to be significant signal to other state-owned generators as NTPC led the state-owned generators' withdrawal from the import market that started in 2015. Currently imports from this group between January and July are down 35% to 10.35mt.

While state-owned plants were able to pass through the cost of coal from overseas, private generators are struggling to use imports, due to fixed tariffs on power purchase agreements.

Imports for private import-based generators were slightly higher year on year in the first quarter but have crashed since and the year to date total is down 15% to 25.10 mt. At recent coal and power prices, generation has not been viable for these power producers.

The day-ahead electricity market would have to average INR4.50/kWh ($0.07/kWh) to justify the current price for Indonesian 4,200 kc GAR coal of around $44.00/t FOB.

This is against an average Indian Electricity Exchange price of INR3.13/kWh in August, from a low of INR2.49/kWh in July.

Because of this and the lack of domestic alternatives, both Essar and JSW have closed units in Gujarat and Karnataka respectively. In addition, Simbhapuri Energy and Meenakshi Energy's import-focused plants have taken no imports since June. Tata Power cut imports for its Mundra UMPP plants by 50% month on month, to 0.52 mt in July.

However, prices jumped to INR5.05/kWH on 14 September, indicating import opportunities could open up, even at these prices.

CIL stumbles

CIL production is down against last year with output for the first five months of the financial year at 193.10 mt. This is 6% below the target of 204.99 mt and down 1% from 194.81 mt produced in the same period of 2016.

Actual deliveries were better than last year, though, at 225.44 mt, up 7% from 211.38 mt sold in the same period of 2016 as it drew significantly from stocks.

Under pressure to supply higher volumes to government owned power plants, CIL has been cutting supplies to the private power sector and the non-power sector contracted consumers. The miner is also cutting offerings for sale through spot e-auctions.

Private generators seek imports further out

Reliance Infrastructure Ltd (RInfra), one of India's leading private power generation companies, has returned to the import market after a notable absence due to concerns over domestic coal availability. It is not seeking coal in reaction to the current supply issues, but is looking for coal further out as hopes of securing domestic supply through a new government linkage scheme have failed.

The company has initially tendered for 1.50 mt of Indonesian material for delivery over three year into west coast India for its 500 MW Dahanu power plant. But it also understood to be preparing another tender for its 600 MW Butibori plant. The Butibori requires 3.5 mt/y and gets 1.2 mt/y through CIL FSA.

The Dahanu power plant requires 3 mt/yr of domestic grade coal. It gets 2.5 mt/y (2 mt after washing) through a fuel supply agreement (FSA) with Coal India Ltd (CIL) and the shortfall is met though e-auction purchases or imports.

RInfra had imported only 0.19 mt coal for its Dahanu plant in Indian financial year 2016-17 (April-March), against 1.07 mt in 2015-16. The fall in 2016-17 imports was due to increased availability of domestic coal and a falling utilisation rate. The plant has so far not imported a single tonne in 2017-18.

IHS Markit reported in March that the company was planning to return to the import market. However, this was delayed after the Power Ministry announced a new initiative called "Scheme for Harnessing and Allocation Koyla (Coal) Transparently in India (SHAKTI)". The company was anticipating some additional allocation of domestic coal under this scheme, which did not materialize.

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John Howland is Managing Director Coal at IHS Markit.
Rakesh Dubey is Editor Indian Markets at IHS Markit.

Posted 26 Sept 2017

Rakesh Dubey is Editor-Indian Markets with IHS Markit. He has over 20 years of journalistic experience covering coal, steel, commodity and financial sector. Before joining IHS Markit, Rakesh was working as Editor of Coal Insights and Steel Insights magazines published from India. He also worked with Reuters, Press Trust of India (PTI), United News of India (UNI) and CrisilMarket Wire (Cogencies).


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