India is likely to witness a sharp rise in coal prices in the near term if the decision to pool prices of expensive imports with cheap domestic produce is cleared by Cabinet. What is more, international prices are tipped to rise marginally over the medium-term once they bottom out after being on a downtrend for the last two years.

This will compound the woes of companies with domestic supply arrangements, who are already crying foul over the prospects of having to bear the burden of cross-subsidising imports.

The price of coal has fallen by 25 per cent in international markets from over $120 a tonne in January 2011 to less than $90 a tonne in December 2012. But the imposition of stricter global norms on coal usage — including a fee for carbon emissions — could drive up the rates over the longer horizon.

This would hurt Indian companies’ dependence on coal, as the pooled price of the dry fuel will also increase. An analysis of the differential between the arithmetic average of Richards Bay, Newcastle and Japan benchmark coal prices vis-à-vis Indian coal categorised as D grade (the best quality available in India) indicates that from $14 per tonne in 2003, the gap between domestic and international pricing shot up to $104 per tonne in 2008.

Subsequently, it fell sharply to $48 per tonne in 2009, but rose in the subsequent two years to $89 per tonne in 2011. In 2012, it has again fallen to about $67 per tonne.

Demand-supply equation

Evidence points toward the strong demand for coal imports in India propping up global prices to some extent. The country has been suffering an acute power crisis due to a shortfall in coal supply, which was precipitated by environmental curbs and a subsequent ban on mining in Andhra Pradesh. Since the majority of power capacity in India is coal-based, the country cannot avoid imports of the fuel.

What is more, with ultra-mega power projects based on coal underway, the demand and reliance on imported coal is expected to rise even further. Imports of coal into India have also been given a boost by the suspension of 5 per cent import duty in thermal coal imports for a two-year period.

By the end of the 12th Five-Year Plan, Indian coal demand is expected to rise to 68.21 crore tonnes, whereas supply is projected at 49.22 crore tonnes.

This will necessitate the import of around 18.9 crore million tonnes of coal to fulfil the demand. While the electricity sector is expected to remain the bulk consumer, demand from the cement and iron and steel industry is also expected to rise sharply.

International price drivers

A slowdown in demand from neighbouring China has the greatest impact on prices. Coal prices in the Communist nation have fallen by 24 per cent in the last six months and regional governments are now taking steps to curtail production amid easing supply, partly due to sluggish industrial activity, but also on account of a surge in hydroelectric power generation.

The fall in Chinese coal prices, however, did not dampen imports, which rose by 69 per cent during the first five months of 2012. This was because, Chinese coal prices were generally higher than international prices, leading more power companies to source their requirement from abroad. This will spur international suppliers to increase prices in the near term.

Among the factors depressing prices, imports by the US have been on the wane due to exploitation of cheap shale gas reserves as an alternative energy source, obviating the need for coal imports. Furthermore, an increase in supply from Australia will affect international markets as miners recover from adverse weather conditions. Output from Indonesia has also remained steady, reducing fears about assured supply and exerting downward pressure on prices.

> arvind.jayaram@thehindu.co.in

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