Coal Imports to Jump 60-65 Million Tonne a Year After Court Scraps Concessions: Analysts

New Delhi: India's annual coal imports could jump by as much as a third to more than 200 million tonnes for the next few years as a result of a court ruling this week that will halt mining of the resource by most private companies from next year.

The Supreme Court has scrapped 214 coal blocks allocated by government over the past two decades after ruling that the selective allocation process was arbitrary and illegal. It ordered that the operational ones among them be returned to state-run Coal India by end-March next year.

The country's coal output has trailed domestic demand for the past several years, and is set to fall even further behind next year as the current operators wind down activity and hand the sites over to the notoriously inefficient Coal India, analysts said. These blocks were expected to produce about 52 million tonnes in this fiscal year.

Shipments into the world's third-largest coal importer rose to 168.4 million tonnes last fiscal year, and the government estimated before the court ruling that the domestic shortage will range between 185 million and 265 million by 2016-17.

"Once the (cancelled) blocks are given to Coal India, it would take time for the company to understand the functioning and operations of these blocks to resume operations in a similar manner," said Prakash Duvvuri, head of research for commodities research firm OreTeam.

"We assess the transition time to be not less than five to six months."

For the country's legion of coal-hungry power plants, steel mills and cement factories - many of whom are already facing critically low coal reserves - this transition period likely means even greater reliance on imports.

OreTeam expects inbound shipments to hit 210 million tonnes in the 2015-16 year. Devendra Kumar Pant, chief economist with Fitch unit India Ratings & Research, projects shipments could jump to over 230 million if demand remains brisk and domestic production fails to rise.

"We expect continuous increase in India's coal imports at least in the next 2-3 years partly because domestic supplies will continue to be lower than demand and also because of expected soft trend in international coal markets," said Viresh Oberoi, chief executive of Mjunction, an online commodities trader.

International thermal coal prices are currently trading at five-year lows.

Import pipeline under strain

India could overtake Japan as the second-largest importer next fiscal year if tonnages top the 200-million mark.

But getting those imported tonnages to the right places at the right times won't be easy, as port and rail capacity is already being heavily taxed by the current flow.

Major coal ports are currently reporting their worst congestion in years, and rail-loading times have slowed due to monsoon rains, causing delays in deliveries to customers.

An additional 60-65 million tonnes per year will place even more strain on the logistics chain and potentially lengthen delivery times, coal analysts warned.

"We are not ready immediately to handle an increase in traffic," said G P Biswal, deputy conservator of Paradip port, one of India's busiest. "It will take some time but we will eventually be ready."

Another concern is that main supplier Indonesia, preferred by Indian buyers due to its suitable calorific content and relatively low freight costs, is implementing a new export licensing program from October 1 that could curb coal exports by over 10 per cent.

Lower shipments from Indonesia bodes well for India's No.2 supplier, Australia, which shipped around 35 million tonnes to the country last year and is in the market for additional buyers after China said recently it would restrict its own coal imports as part of a crackdown on pollutants.

But Australia's coal prices are generally up to 10 per cent higher than Indonesia's for Indian buyers, a trader said, especially when the cost of lengthier freight times are factored in. South Africa, Russia and the United States are other coal exporters that may target India.

But for Indian buyers, costs remain the main issue. Forced by populist governments to sell power below costs, many electricity generators are already running losses.

For money-losing MP Power Generating Co in the central state of Madhya Pradesh, importing costs them double the amount that Coal India charges.

"Given that supplies from Coal India are low, we may have to import again," said A K Sankule, head of fuel management at the company. "But we are financially stressed."

Copyright @ Thomson Reuters 2014