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India's coal imports will rise...rise...rise! - Views on News from Equitymaster
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  • Mar 16, 2012

    India's coal imports will rise...rise...rise!

    Coal remains India's most important fuel, and is predominantly used to generate electricity. Most of the coal is consumed by power sector (64% for utility and 7% for captive consumption) in India, followed by steel (11%), cement (3%) and others (15%).

    India is the third-largest coal producer internationally, with an annual output of 533 million tonnes (mt) in FY11. In spite of this globally significant amount of production, India cannot meet its own domestic demand, and depends on imports to fill this gap.

    Coal Demand and Supply scenario in India
    (million tonnes) FY07 FY08 FY09 FY10 FY11 FY12E
    Coal production 431 457 493 532 533 534
    Domestic demand 464 504 549 582 612 686
    Shortfall in domestic supply met through imports 33 47 56 50 79 152
    Imports as % of demand 7% 9% 10% 9% 13% 22%
    Source: India Ministry of Coal

    Sources of domestic supply

    There are three main sources of domestic production as outlined below:
    • Coal India (CIL): Coal India has 65 billion tonnes (bnt) of coal reserves, and accounts for 80% of India's coal production. CIL‘s total coal production has been flat at 430 mt through FY10 and FY11.

    • Singareni Collieries (SCCL): SCCL is jointly owned by the Government of Andhra Pradesh and the Government of India. It has 9 bnt of reserves and accounts for nearly 10% of domestic production.

    • Captive Producers: The Coal Mines (Nationalization) Act 1973 was amended in 1993 to allow coal mining for captive end user consumption in the power, cement and steel private sectors. 195 blocks have been allotted so far, with reserves amounting to 43.3 bnt, or 15% of the estimated coal resources in India. Captive coal blocks account for 7% of coal production.
    Why the demand - supply mismatch?

    The fundamental reasons for domestic supply not keeping pace with demand are:
    • Delays in environmental/forest clearance: Forest clearance approvals take several years. The Ministry of Environment and Forests (MoEF) ensures that coal producers take into account adequate environmental safeguards.

    • Shortage of rakes (trains each with 3,500 tonne capacity) in India: Around 50% of India's coal is transported via rail. Rake availability has been a severe constraining factor in making coal available to the end user.

    • Heavy rainfall; strikes; agitation: Coal availability has been affected by heavy rainfall, strikes by contract workers and employees, which have resulted in lower production.

    • It is unlikely that these supply limiting factors will improve anytime soon.
    In conclusion, India's domestic demand for energy and coal will continue to increase with its growing economy and budgeoning middle class. However, the domestic supply situation in India does not look promising. As per the Planning Commission, domestic coal demand will increase to 1.0 bnt by the end of the 12th Five-Year Plan (2012-2017). Imports of approximately 200 mt will be needed to bridge the shortfall in domestic output. The demand-supply deficit has been trending higher over the years from 33 mt (7% of demand) in FY 07-08, to 79 mt (22% of demand) in FY 10-11.

    In the coming years, India's coal situation will continue to be characterized by regulatory, political and logistical risks; and severe domestic shortfalls with an increasing reliance on imports. Unless the Indian government resolves these longstanding issues, this could bode bad news for power companies who rely heavily on coal, and Indian consumers.



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