Raw Input. Coal — down in the dumps

International coal prices are down and may continue to remain low due to supply-related and demand-side developments. But the Indian coal sector, which is in an exciting phase with a slew of regulatory changes, is well-sheltered from the global price turmoil.

Globally, coal prices have been on a downtrend in the last three years and are at the lowest levels since 2009. Prices of steam coal, a slightly lower grade that is used in power generation, have halved since 2011 to $62 per tonne now.

The fall in prices can be attributed to supply not shrinking despite slack demand. For instance, demand from China — the largest consumer of coal accounting for half of the total global demand — has been slow. After growing at over 10 per cent annually during 2001-2011, the country’s demand has fallen — imports were down to 150 million tonnes (mt) in 2013, from 182 mt in 2011. And given the pollution-related issues, it is expected that the country may look at cleaner sources more actively, holding down demand. Goldman Sachs estimates that imports will fall to 75 mt by 2018; globally, annual demand growth is expected to average 15 mt during 2013-2018, down from 60 mt per year average growth during 2008-12, as per Goldman Sachs.

On the supply side, producers such as Australia and Colombia are not likely to cut output in the near term. In the case of Australia, the miners are stuck due to “take-or-pay” contracts requiring that they pay over $20 a tonne for transport costs whether or not they ship coal. So miners are continuing to export in spite of sliding prices. Output from Colombia could increase by 12.8 per cent in 2014 to a record 97 mt, according to its deputy mining minister.

One bright spot for coal prices has been the export cutback in Indonesia due to the new regulations that require approvals from mining and trade ministries. Also, nearly one-fifth of global exports are not profitable if prices are at $72 a tonne, notes Morgan Stanley. However, it is expected that producers are more likely to keep mining rather than shut down. Australia’s Bureau of Resources and Energy Economics, for instance, notes that Indonesia may increase shipments to 420 mt this year.

Currently, about 20 million tonnes a year of production needs to be cut by miners to help re-balance the market, according to UBS. However, supply cutbacks to the tune of 7-8 mt have only been implemented, as per Teck Resources of Canada.

There is more bad news, as Morgan Stanley estimates that the supply glut will double to 14.9 mt in 2015, as global exports climb to 989 mt in 2015, from 959 mt in 2014. So the sustained supply may keep prices low in the next one to two years.

The local dynamics for coal differ from international factors, as with other ore such as iron.

India heats up

For steam coal, demand outstrips supply and the gap would likely continue to widen. Glencore, a large coal trader, estimates that Indian imports will jump to 180 mt in 2015 and onto 300 mt by 2020. This is up from 169 mt in 2013-14.

Supply has been constrained by Coal India — the world’s largest coal miner — which has a monopoly on coal production.

Coal supply is, however, expected to increase as 90 of Coal India’s greenfield and brownfield mining projects are put on the fast track by the government.

But prices of many low grades of coal — which shot up by 5 per cent in June 2014 — may be raised by another 10 per cent in 2014-15.

The e-auction coal prices, which were on a downtrend from around ₹2,900 per tonne last year to around ₹2,200 per tonne in the last quarter, may also reverse.

This is due to a reduction in e-auction volumes to 35 mt in 2014-15, from 58 mt in 2013-14. E-auction prices have historically been over 50 per cent higher than prices notified in fuel supply agreements.

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