The coal market has stayed immune to the broader commodity market sell-off in recent weeks. After lacklustre conditions witnessed in April with limited liquidity keeping the coal market within a narrow range, there are signs of life; and interestingly, strength in Indian import has turned out to be a big driver of price support for thermal coal.
Although resurgence in Chinese demand is pointed out as the key factor underpinning a solid outlook for thermal coal pricing, trade data suggest that demand from India has been critical in tightening the market. Indian demand is also seen as critical for the prospect of seaborne coal pricing in the coming quarters.
It is estimated that Indian imports of thermal coal have lifted considerably in March and April. From around five million tonnes in January and February, import volumes have expanded to an estimated nine million tonnes in April, Macquarie Commodities Research said in a recent report quoting industry contacts.
Data, Hard to come by
It is, of course, known in the market that accurate and timely import data are hard to come by in India. Analysts often look at export shipments from origins to estimate Indian purchases. However, coal exports from Indonesia suffer from the same problem of lack of timely and reliable trade data.
Looking ahead, the prospects for coal imports in India during the second half of the year look good. According to Macquarie, a lot will depend on monsoon conditions which at present are not entirely clear.
Cooler weather last year had a marked impact on thermal generation and also weighed on merchant power pricing which is a segment of the wholesale power market which is closet to a market determined price within India.
“Lower merchant prices will have a marked impact on those IPPs (independent power producers) which import coal and sell power into this market,” the report remarked.
There are several coastal power units that are due to come online which should not have an issue in terms of pricing energy.
The first 800-MW unit of Tata's Ultra Mega Power Plant in Mundra is due to come into commercial operation in September, with the second unit also expected to come online early next year.
Adani is to complete phase-3 of the expansion of its Mundra plant by the middle of this year with the 5th unit (660 GW) to come online, with phase-4 expected to be completed by March 2012. The Ratnagiri plant of JSW is set for a 600-GW expansion after the first unit came online late last year.
So, the overall sense is that India's coal demand should be strong in the second half with new coal plants coming online, Macquarie surmised.
“However, it may be necessary to keep an eye on power pricing heading into the monsoon season, as this could be a significant swing factor influencing demand for those who are blending coal and tend to be price sensitive when it comes to importing coal,” the report pointed out.
In India, despite an increase, coal production trails consumption requirements as demand has been rising rapidly, especially from the power sector which in turn has widened the demand-supply gap necessitating higher imports.
The supply gap or import requirement for 2009-10 was 73 million tonnes which for 2010-11 is estimated higher at 83 million tonnes. According to the Coal Ministry, the gap is projected to widen further to 137 million tonnes in 2011-12 (terminal year of 11th Plan) with a projected total requirement of 696 million tonnes of coal.
The next two quarters pose upside risk to coal prices. In addition to anticipated strong Indian imports, low levels of northern European hydro reservoirs are causing concern.
If water shortage worsens, coal burn may increase. China's ongoing power crisis in many provinces is of course already known.