Coal Insights Bureau

In line with the surge in recent years, India’s imports of coal and coke crossed 50 million tons (mt) during the first quarter (April-June) of 2014-15 (FY15). Going by the trend, analysts forecast total imports may reach close to 200 mt in FY15, which is about a 10.4% jump over 181 mt imported last year.

As estimated by Coal Insights, as per an estimate based on monitoring of vessels and customs data, coal and coke imports stood at 50.94 mt in the first quarter (Q1) of FY15. This however showed a modest increase of 3.87% over 49.04 mt imported during the same period last year.

Of the total imports in Q1 FY15, steam coal accounted for 40.2 mt, coking coal 8.48 mt and anthracite and PCI coal around 0.2 mt. Imports of pet coke were at 0.39 mt while that of met coke was estimated at 0.2 mt.

“Although there is a sluggish trend in the domestic economy, the low international prices have attracted Indian buyers to enter into bargains, resulting in increased volumes during the quarter,” an industry analyst said.

If the current trend persists, he said, total imports of coal and coke may reach close to 200 mt in FY15. This will include around 152 mt of non-coking coal and 38 mt of coking coal imports besides around 10 mt of other coal and coke products.

Incidentally, the first quarter import figures show a drop in coking coal imports by the domestic steel sector, compared to the volume imported during the same quarter last year. Coking coal imports during Q1 FY15 stood at 8.48 mt, about 9.8% lower than 9.4 mt imported in Q1 FY14.

The data further shows that coking coal imports were down in the months of April and May, 2014 in comparison to the volumes imported during the same months last year. Only the number reported for June showed an increase on a year-on-year basis.

Going by the trend, coking coal imports may not show any significant increase in FY15 over 35.79 mt imported last year.

“The prolonged slowdown in the Indian steel industry is slowing the growth in coking coal imports. Along with low demand for steel, the industry is facing problem in sourcing iron ore, the other vital inputs required for steel-making. Overall, coking coal demand is likely to stay subdued in the near term,” the analyst said.

In fact, a closer look at the import figures shows that almost the entire increase in coal import volumes in 2013-14 (FY14) came in the non-coking coal segment. During the last four years (FY11 to FY14), coking coal imports have grown by only 5 mt (from 29.4 mt to 34 mt), while that of non-coking coal leapfrogged by 50 mt (from 83.1 mt to 135 mt). The same trend is likely to prevail in the current year.

Coal imports during April-June 2014 (in mt)

Government’s stance unclear
Although it is widely debated that the bulging import bill of coal into India is an avoidable expenditure, the government seems to care less about taking corrective measures. The previous UPA government did precious little other than issuing repeated reminders to Coal India Ltd (CIL), the major supplier of the fuel in India, to jack up production. The new NDA government seems to be giving mixed signals so far as imports of coal is concerned. On one hand, it has asked the power sector to import more coal to run their plants. On the other hand, it has hiked the customs duty on coal in its maiden Annual Budget 2014-15 placed by Finance Minister Arun Jaitley in July.

“In order to ensure adequate availability of coal,” Coal and power minister Piyush Goyal recently said in a written reply to the Rajya Sabha, “Coal India Ltd has been impressed upon to enhance production of domestic coal in the country and power utilities have also been advised to enhance imports of coal.”

The minister was quiet about the likely impact of becoming more and more dependent on imported coal. According to sector analysts, it raises issues like how the power sector will deal with the cost increase or whether the utilities will be allowed to increase tariff.

“At this point, the entire focus is on increasing generation so as to meet the overriding objective of power for all. But if the generation companies are to become more and more dependent on imported coal, the cost of generation will increase and hence the consumers will need to shell out higher bills. The question is if power thus produced be affordable for all? If the tariff remains same, the government has to increase its subsidy or distribution companies (discoms) will have to bear more losses,” an industry source said.

Impact of duty hike

Adding further confusion, the Budget has proposed a customs duty hike on coal imports, both coking and non-coking.

“At present, coal attracts customs duties at different rates. I propose to rationalise the duty structure on all non-agglomerated coal at 2.5% basic customs duty and 2% countervailing duty," Jaitley said in his Budget speech. He also proposed levying a basic customs duty of 2.5% on metallurgical coke.

According to industry sources, this hike comes as a surprise at a time when the government is advising power plants to import more of the material. Most of them were, however, of the opinion that it won’t have much impact on import volumes.

“The duty hike won’t impact the import of coal to any significant extent. If there is unmet demand, imports will continue to surge. The importers anyway sell coal on a cost- plus basis. But, obviously, the cost of the imported material will go up to the detriment of the power and steel producers,” the analyst said.

There, however, is a bigger risk involved, the industry official said. Currently, international coal prices are on a downcycle. In the last three years, prices of non-coking coal have fallen about 40%, thanks to abundant supplies from Indonesia and Australia and slowing demand in China and Europe.

The price of South African non-coking coal (6,000 NAR) has dropped from about $116/ton FOB in July 2011 to $72/ton in July 2014, almost a 38% drop. Australian non-coking coal (6,300 GAR) has plunged more than 40% from about $122/ton FOB in July 2011 to $70/ton FOB in July 2014. Likewise, Indonesian coal prices have plummeted by around 35% during the same period.

In the coking coal segment, the drop has been much steeper as current prices of premium low-vol or Peaks Down variety in Australia are about one-third of the prices witnessed three years ago. Met coke prices have also become half in comparison to the period mentioned.

“Now, if the coal prices – for some reason – go back to the level witnessed three years ago, there will be a total disarray,” the official noted. “The same will happen if there is a sharp depreciation in the currency (rupee), something that we encountered last year. And a combination of both could lead to a crisis for the economy as a whole.”

FOB prices of SA, Indonesian & Australian steam coal ($/ton)

This is somewhat akin to becoming too reliant on products imported from, say China, he said. “Such products are mostly cheaper compared to domestically produced items. But if we stop producing those items (because of easy and cheaper supply from elsewhere), there could be a problem. The sourcing country may charge a premium on such products and we will be under compulsion to take that price,” he added.

However, there is another view in the industry about the government’s activities. While it’s too early to judge the performance of a new government (which assumed office only in May-end), industry sources point to the announcements made regarding sprucing up railway links and opening up coal to competition.

“It may also be the case that the government is chalking out a mid-term plan to end the coal impasse facing the country. It will obviously take time to lay new rail network, set up washeries and frame new policies. In between, there is no other option but to go for imports, more so at a time when international prices are at rock-bottom levels,” said a coal industry veteran.