Heating Woes On Coal Ruling
BMI View: India's reliance on coal imports will increase over the coming years particularly in light of the country's court ruling that all coal mining licences awarded between 1993 and 2010 were illegal.
We expect India to remain heavily reliant on seaborne coal over the coming years. In yet another blow to the country's coal sector, India's Supreme Court ruled on August 25 that all 218 coal mining licences awarded by the government between 1993 and 2010 were illegal. The allocation of these licences was reportedly associated with allegations of corruption and mismanagement, with the transferral of cheap mining rights costing the government USD30bn in lost revenue.
|Seaborne Reliance To Persist|
|India - Coal Production, Consumption & Balance (mnt)|
While only 30 out of the 218 coal mining blocks have been developed, an outright cancellation of these mining operations (scheduled for further hearing) will deal a hard blow to both the domestic power and steel sectors. As shown by the charts below, the share prices of Indian conglomerates including Adani Power, Reliance Power and Jindal Steel & Power have been battered by this latest announcement. Many Indian utilities are already battling with depleting coal stockpiles that have continued to stifle their power generation capacity.
|Share Price - Adani Power (RHS) & Reliance Power (LHS), (INR), daily charts|
According to Bloomberg Intelligence, 52 power producers are currently sitting on less than a week of coal supplies, compared with an average of 30 over the past three years. Indian steelmakers such as Tata Steel and JSW Steel are also coming under pressure from the inherent shortage in domestic coal production. Ominously, the Indian government's decision to double the tax on both coal imports and production to USD1.67/tonne in July 2014 will further increase the import bill for domestic consumers.
|Critical Coal Shortage|
|India - Coal Stocks & Number of Power Producers with less than 4 and 7 days of Coal Stocks|
Apart from stepping up on seaborne purchases, many Indian steelmakers have ventured abroad for mining investment. Indeed, Steel Authority of India Ltd (SAIL) formed a joint venture (JV) named S&T Mining with Tata Steel in 2008 with the aim to secure, develop and operate coal mines overseas. The JV is currently on the lookout for coking coal assets with an output of more than 2.0mn tonnes per annum (mntpa) and a minimum asset life of 25 years. In particular, S&T Mining is interested in advanced-stage coal mining projects that are either producing or are one to two years from starting production.
|India - Thermal Coal Imports (mnt)|
Our core view remains that India will absorb more seaborne coal over our forecast period to 2018 ( see 'Thermal Coal: Supply Overhang Here To Stay', August 21). Energy poverty will remain a key concern in the country and coal will be the only realistic option to proving base-load energy for the local population over the medium term. Infrastructure deficits, significant regulatory and bureaucratic hurdles will continue to impede production from state-owned miner Coal India Ltd (CIL).
|Supply Glut To Cap Price Gains|
|Newcastle Steam Coal, 6,700kc GAD fob (USD/tonne)|