India Inc to face significant cost inflation on high imported coal prices: ICRA

As per latest ICRA note on the coal sector, this will severely impact domestic users of imported coal since, notwithstanding some moderation from the all-time highs of March 2022, coal prices are expected to stay elevated throughout FY2023.

Russia remains a key supplier of coal in the seaborne market, accounting for 17% and 10% of the international trade in thermal coal and coking coal respectively. With SWIFT sanctions imposed on some Russian banks and concerns over counterparty credit risks, buyers are unable to trade with Russian coal suppliers. Moreover, a growing number of Western power utilities are also looking to voluntarily place an embargo on Russian coal supplies, which is leading to disruptions in the normal coal trade flows, said the ratings firm.

Consequently, on March 3, 2022, eight days into the Russia-Ukraine conflict, seaborne thermal coal prices jumped to an all-time high of US$ 430/MT as Western countries started to impose sanctions on Russia.

Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said, “Notwithstanding elevated prices, supplies from non-Russian sources are unlikely to fully compensate for the shortages in Russian supplies as miners have limited spare capacity to ramp-up production. As coal supplies remained tight, domestic spot e-auction premiums for auctions conducted by Coal India Limited reached all-time highs, climbing sharply to 270% in February 2022 as against 30% in February 2021. Our channel checks suggest that domestic e-auction premiums reportedly increased further to 300% in March 2022. Within the regulated sector, imported coal-based and merchant power stations, which lack a long-term coal linkage, will absorb the maximum impact of this price rally. Within the non-regulated sectors, steel, cement and aluminium producers will encounter significant cost increases.”

Coming to the domestic coal demand scenario, following a 5.2% year-on-year contraction in FY2021, it has rebounded sharply in the current fiscal. India’s coal demand is poised to cross the landmark 1 billion tonne mark for the first time in FY2022, representing a healthy 12-13% growth over the previous fiscal. With a gradual recovery in economic activity, domestic coal demand is expected to grow by a modest 5-6% in FY2023 as per ICRA’s baseline scenario.

Looking at the domestic coal availability situation, coal imports are estimated to contract by 14% Y-o-Y in FY2022 as users look to replace costlier imported coal with cheaper domestic coal, to the extent possible. With international coal prices increasing further now, this trend in likely to continue in FY2023 as well, putting pressure on domestic miners to ramp up production. A high FY2021 year-end coal stock played a crucial role in helping India tide over the energy crisis that surfaced in October 2021. Almost 83 mt of this reserve coal stock was consumed between April 2021 and October 2021 to meet the surge in domestic coal demand following the pandemic.

“Our coal stocks in the run-up to the peak summer months remain quite low. As on March 13, 2022, combined coal stocks at Coal India’s pitheads and thermal power generation stations stood at 74 mt, as against 128 mt as on March 31, 2021, 120 mt as on March 31, 2020, and 85 mt as on March 31, 2019. We expect Coal India to close FY2022 with an annual production of 627 mt, much lower than the targeted 670 mt. As per ICRA’s estimates, given the prevailing low coal stocks, and the steadily rising coal demand, Coal India would need to increase production significantly to 700 mt in FY2023 to avert a domestic coal shortage next fiscal,” Roy added.

There is a possibility of the prevailing abnormally high international coal prices moderating going forward. This will happen as the seaborne market gradually readjusts to the new trade channels following the imposition of sanctions on Russia. However, notwithstanding this decline, in ICRA’s baseline scenario, average international thermal coal prices in FY2023 is expected to remain higher by 35% over FY2022, which would lead to elevated cost pressures for coal consumers in the coming fiscal. In a pessimistic scenario of a further escalation of the prevailing geopolitical situation, seaborne coal supplies could get disrupted more than anticipated, leading to prices remaining highly elevated throughout the next fiscal, significantly aggravating the input cost pressures for buyers.