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King Coal: The Return of the Prodigal Son

Mar 12, 2022

King Coal: The Return of the Prodigal Son

Markets around the world are in free fall. Since the beginning of February 2022, the BSE Sensex is down over 10%.

If you look at the broader markets, it's a blood bath with some stocks having crashed as much as 50% over the last few weeks.

Hundreds of stocks are trading close to their 52-week lows...

But there is an anomaly... Coal India Ltd over the same period has gained over 16%.

Yes, Coal India - one of the most unloved stocks in recent years!

Not bad for a company that produces coal, a commodity that market experts have loved to leave for dead for over a decade now.

Resurrection of Coal

Global coal markets were already facing a supply crunch prior to Russia's invasion of Ukraine. The war is likely to exacerbate the situation.

A sharp increase in energy demand as economies opened up caused 'beyond normal' shortages of natural gas, oil, and coal around the world.

Currently, international coal prices are at their lifetime high above US$ 400 per tonne.

With Russia's invasion of Ukraine, there is an anticipation of lower supply of coal in the global market, thereby driving up the prices in the international market.

Another factor could be the rise in the price of alternate fuels like crude and natural gas.

The world is living through the first major energy crisis of the clean-power era. It won't be the last.

And truth be told, we are struggling...

Governments around the world are looking at 'dirty fuels' once again as they scramble to meet their burgeoning needs amid the energy crisis. This has raised questions about the dependence on renewable energy.

Maybe it is time we realise and acknowledge that energy transition will take time, potentially decades and governments need to be more pragmatic and flexible going forward.

After Solar, Wind, Hydro... it's Coal Again

Coal as a commodity has had a rough couple of years.

Between Narendra Modi's promise to ensure half of India's energy would come from renewables by 2030, pervasive health and environmental issues, and continued cost declines in solar and wind, there's not a lot of love for the combustible black rock.

If coal was a boxer, it would be George Foreman: a retired underdog boxer, who peaked years ago looking for a comeback by defeating all odds.

For years, experts have claimed that humankind needs to switch to solar, hydro and wind energy to address climate change. But is it really working out?

Take a look at Europe's self-manufactured energy crisis...

Starting in 2009, European Union countries set out binding targets to phase out their coal-fired generating plants in pursuit of slowing the pace of global warming.

For the most part, the effort worked. Coal plants across Europe died an undignified death with about half gone or slated to close soon.

However, the bad news is the Europeans are guilty of a mind boggling lack of planning. What was lost - coal-fired plants and their ability to meet peak demand fairly quickly - was never adequately replaced.

Wind and solar power production soared in the last decade. But these renewable sources are essentially 'uncontrollable' supply resources. When the sun isn't shining, solar panels do not produce energy. When the wind isn't blowing, turbines do not produce either.

Diminished conditions, including shading, clouds and dust for solar and light breezes for wind power all reduce energy production from renewable assets to levels below the installed capacity.

And this was the case in 2021- due to extreme climatic conditions, there was a sharp drop in solar and wind energy production in Europe and the US which led to a significant rise in price of fossil fuels such as coal and natural gas.

Dispatch of fossil fuel-based power plants, on the other hand, can easily be controlled, ramped up and down as needed and hence fossil plants offer great reliability, i.e., power can be produced when needed.

The same is simply not possible with solar and wind power plants.

With all the talk of renewable energy being the answer to our energy needs, amid spiralling gas and coal prices, these uncontrollable climate conditions are a clear reminder of how variable this form of generation can be and that it cannot be the sole investment for a reliable future energy grid.

Coal is Here to Stay

At the COP26 climate summit in Glasgow in November 2021, at least 23 countries made new commitments to phase out coal power, including in south-east Asia and Europe.

'Countries are turning their back on coal and towards cheaper, cleaner renewables.'

'I think we can say with confidence that coal is no longer king,' said COP26 President Alok Sharma.

Four months on, the global energy landscape has shifted dramatically - and not in the direction Sharma had hoped.

Far from declining, coal use globally surged to record levels over the winter as renewables simply couldn't cope up with demand.

And that was before Russia invaded Ukraine. The war has precipitating a global energy crisis that has forced countries, especially in Europe, to look for ways to quickly wean themselves off Russian oil and gas, and reconsider timelines of commitments to cut the use of fossil fuels.

Ultimately, the energy crunch is likely to make coal even more important in the eyes of major users. It reaffirms that all resources - especially the most essential ones - must remain as viable options to support human progress.

Coal in India = Coal India Ltd

Coal India Limited (CIL) is among the largest coal producing companies in the world. It accounted for an estimated 85% of domestic coal production in the year 2021.

CIL forms a critical part of India's economy as the largest coal supplier to India's power sector.

Regardless of the focus on renewable energy and generating cleaner electricity, the thermal power industry has grown consistently. Phasing out coal plants is no easy task, especially when India doesn't have another source of cheap fuel.

The US, which phased out coal plants, could do so because it had large shale gas reserves. With the easy availability of cheap shale, phasing out thermal plants made economic sense.

However, for countries like India and China, coal remains an integral part of the energy mix.

With power demand expected to triple by 2040 as India's population continues to achieve upward mobility, fossil fuels, particularly coal is poised to see continued growth even as the clean energy market thrives.

As a percentage of India's total power production, coal is expected to decline from 70% to 50% over the next decade, according to India's Central Electricity Authority.

But in absolute terms, coal use will increase as India's overall energy demand grows.While renewable energy may be able to displace coal predominantly for electricity, there are fewer short-term alternatives for industrial use of coal, especially in the cement and steel sectors.

Coal is entrenched in a complex ecosystem. In some states, it's among the largest contributors to state budgets.

The Indian Railways, India's largest civilian employer, is afloat because it overcharges coal to offset under-recovery from passengers.

Before India can phase out coal, it must first achieve a plateau of coal. How this happens cost-effectively and with least resistance isn't just a technical or economic question. It depends on the political economy of coal and its alternatives.

India has an ambitious renewable energy targets for 2030, calling for about a four times growth of today's installed wind, solar, and hydro capacity.

Assuming India doesn't build any more coal power plants, it still means that in 2030 about half of India's electricity will come from coal.

In recent news, Coal India (CIL) said it has moved past the previous highest coal off-take of 608.14 MTs achieved in FY19.

CIL said it is concentrating its efforts to increase its supplies further in a bid to touch 670 MTs off-take mark in FY22.

CIL had pipped the 575 MT total coal despatch of FY21 on 16th February itself. Off-take ending FY20 was around 580 MTs.

CIL has set a target to increase production to 1 billion tonnes by 2024 to meet the rising demand.

Several projects have been identified and areas assessed for CIL to achieve the projected growth. This would help reduce India's dependence on coal imports.

Recently, the company announced its plans to directly export output to Bangladesh, Nepal, and Bhutan.

International coal prices have grown at a rapid pace over the past one year and currently command the highest rates in a decade.

Domestic coal prices have remained lower than international prices, which could result in greater demand for CIL's coal.

The company is set to raise prices.

On a consolidated basis, the PSU coal major's net profit jumped 47.7% to Rs 4,556.54 cr on 19.7% increase in net sales to Rs 25,990.97 cr in the third quarter of FY22 over the same period last year.

"Phase Out" or "Phase Down"

India's supposedly last-minute insistence to change the complete "phase out" of coal to "phase down" at the COP26 in Glasgow came under the scanner by many commentators and sections of the media.

However, India's action was a necessary move as it needs a clean energy transition rather than a coal transition.

India's situation is not comparable to that of developed countries, because it has the problem of an inflexible access to energy. It will be able to decrease the use of coal only over time while developing alternative energy sources.

And it's not just India. In reality, the gap between the world's ambition to get rid of coal and the reality of its energy system hasn't been wider.

China's coal production reached record levels last year as the state encouraged miners to ramp up their fossil fuel output to safeguard the country's energy supplies through the winter gas crisis.

Coal plants in the US and the EU produced 20% more electricity last year.

Governments in green-conscious Europe turn a blind eye to burning coal for electricity when the wind isn't blowing, the sun isn't shining, and when natural gas becomes too expensive.

Many believe that part of the reason price of coal is so high right now is because of a structural decline, which means a lack of investment into new coal projects and consequently a smaller supply.

It's expected that international prices will cool off soon but for countries like India and China in particular, demand is expected to remain strong irrespective of the Russia-Ukraine situation.

Coal is a foundational resource, so demand typically grows as the population and economy expand.

For India, increasing electricity output while cutting coal - will require huge growth in renewables, especially wind and solar, paired with energy storage.

But at the same time as coal has been enjoying its great comeback, renewables have been struggling.

Due to a combination of logistical headaches and trade war woes, neither solar nor wind is on track to grow as much this year as it would in a net zero emissions scenario.

It seems coal is not going anywhere. At least, not yet.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

Yazad Pavri

Yazad Pavri
Cool Dad, Biker Boy, Terrible Dancer, Financial writer
I am a Batman fan who also does some financial writing in that order. Traded in my first stock in my pre-teen years, got an IIM tag if that matters, spent 15 years running my own NBFC and now here I am... Writing is my passion. Also, other than writing, I'm completely unemployable!

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