Vijay Kumar Gaba

Now, since the supplies from other large coal producers, e.g, Indonesia, Australia and the US have improved materially, and European countries have built strong reserves, it is likely that the coal prices may remain stable or even decline further in the near future. Alongside correction in the thermal coal (used mostly in energy generation) the prices of metallurgical (met) coke, calcined petroleum coke (CPC) and coking coal (used by a variety of industry to fire blast furnaces, smelters, etc.) have also corrected, though in proportion to the thermal coal; easing cost pressures a wide spectrum of industries.

Some experts have forecasted the thermal coal prices to bounce back to US$175-200/ton range by the end of 2023 and stabilize there, though the World Coal Council believes that it all depends on how the economies of India and China would behave. July Ndlovu, chairman of the World Coal Association (WCA) and chief executive of South Africa's Thungela Resources (TGAJ.J), was recently quoted by Reuters saying “Europe's "disproportionate" role in deciding coal prices was over. Going forward ... what happens with China and India is what would drive the fundamentals for energy, because that's where growth and energy demand is". (see here)

Interestingly, while “peak oil” has been a regular topic of discussion amongst the market participants, the discussion on “peak coal” is not that popular. In a recent article Observer Research Foundation, highlighted that the sharp rise in coal demand in India may have pushed back the “peak coal” by a few years.

As per the article—

In 2020, the International Energy Agency (IEA), categorically stated that global coal demand peaked in 2014 and coal use in power generation is likely to peak before 2030. Coal use in China, which accounted for 50 percent of global coal consumption, was expected to peak around 2025. Global coal demand was not expected to return to its pre-COVID-19 levels and coal’s share in the global energy mix was expected to fall below 20 percent for the first time since the industrial revolution.

Though coal demand in India was projected to increase in the foreseeable future accounting for 14 percent of global demand by 2030, growth in coal demand was projected to be substantially lower than what was expected earlier. The IEA expected demand for coal (for power generation) in India to increase only by 2.6 percent annually till 2030.  Some reports suggested that demand for coal for power generation in India peaked in 2018 and is unlikely to return to pre-COVID-19 levels given the high target set for RE by the government. Post COVID trends in coal demand growth in India suggests that this view reflected hope rather than reality (emphasis supplied).

In 2014, the year that was supposed to represent “peak-coal” according to the IEA, global coal demand was 5.680 billion tonnes (BT) in which thermal coal used for power generation accounted for 4.347 BT or over 76 percent. In 2021, global coal demand was 7.947 BT in which thermal coal demand was 5.350 BT.  Coal demand growth stubbornly refused to oblige projections of peak coal in 2014. In 2021 coal demand was close to its all-time high contributing to the largest-ever annual increase in global energy-related carbon dioxide (CO2) emissions in absolute terms. (emphasis supplied).

Global coal use is set to surpass 8 BT for the first time in 2022 eclipsing the previous record set in 2013, according to the IEA. Globally higher natural gas prices amid the global energy crisis have led to increased reliance on coal for generating power. In China, the world’s largest coal consumer, a heat wave and drought pushed up coal power generation during the summer, even as strict COVID-19 restrictions slowed down demand. In India heat waves in 2021 and 2022 increased the demand for coal-based power for cooling and irrigation. The demand for coal-based power in India and elsewhere is likely to continue in 2023 as record heat waves are anticipated on account of El-Niño.

In spite of the ambitious clean energy targets, Coal continues to be a critical factor in India’s growth and development plans during the next decade. According to a government-appointed high-level committee headed by the vice-chairman of NITI Aayog to advise on liberalization of the coal sector, “coal is not to be viewed as a source of revenue but instead, be considered as an input to economic growth through the sectors consuming coal.”

The committee recommended that the government should focus on early and maximum production of coal and work towards its abundant availability in the market, especially to bring faster economic development to the ‘aspiring regions’ of the country.

Accordingly, ambitious targets have been set for domestic coal production, coal bed methane, and coal gasification. To attract investment, the government has opened coal resources for commercial mining and it expects that commercial production of coal will have a positive impact on the production and processing of steel, aluminium, fertilisers and cement.

Obviously, it will have an impact on a number of businesses, primarily producers, importers, users and transporters of coal. The most interesting would be to watch how the private competition impacts the public sector coal producers. For investment, I would be exploring mining equipment and coal logistics companies rather than the coal producers and consumers.

Evidently, the first half of 2022 saw a sharp surge in commodity prices led by energy and food prices, ostensibly due to the Russia-Ukraine conflict and severe drought in many parts of the world. However, easing of post Covid logistic constraints and monetary tightening by most central bankers led to an improvement in supplies; demand destruction and unwinding of speculative positions; resulting in lower commodity prices.

However, if we analyze the internals of commodities markets we find huge variation in price performances of various commodities within the same category. For example-

·         Energy: crude oil is literally unchanged for the year; Ethanol, Naptha, Propane etc. have lost 15% to 35% for the year; whereas Coal (+147%) and Natural Gas (+84%) recorded huge gains. Wind Energy and Solar Energy prices are down over 10% YTD2022; whereas electricity prices in European nations are higher by 37% (UK) ti 105% (France).

·         Precious metals: Gold is unchanged for the year; while silver(+5%), platinum (+10%), and Titanium (+27%) are ending the year with decent gains.

·         Other metals: Steel (-59%), Tin (-39%), and Copper (-11%) are major losers in the metal universe. Aluminum, Lead, Zinc are also ending the year with some losses; whereas Lithium (+157%), Bitumen (+20%) and Nickel (+46%) have bucked the trend. LME Index fell ~6% YTD2022.

·         Chemicals: PVC (-28%), Soda Ash (-13%), DAP (-13%), Urea (-41%), were some major losers during the year. Polypropylene and Polyethylene etc. are mostly unchanged for the year.

·         Agriculture produce: Coffee (-33%), Cotton (-25%), Rubber (-20%), Palm Oil (-20%), Wheat (-9%), etc. are ending the year with strong losses; Sugar, Cocoa, Tea are little changed; while Rice (+20%), Soy (+17%), Corn (+10%) are some notable gainers. US Lumber prices are lower YTD2022 by over 60%.

As of this morning, the uncertainty in the commodity markets appears much higher than the equities. The following uncertainties, for example, could continue to impact commodities markets in 2023 also:

·         Covid situation in China and growth trajectory post opening. A sharper recovery than presently estimated may again lead to a strong rally in many commodities.

·         A ceasefire in Russia-Ukraine conflict with easing of sanctions on Russia could impact energy and food markets materially.

·         A deeper recession triggered by persistent monetary tightening could result in sharper demand destruction and further inventory unwinding, resulting in further cuts in commodity prices. On the other hand a softer slow down followed by a guided recovery (monetary easing) could result in accelerated inventory rebuilding and sharper price inflation.

·         Extension of La Nina conditions beyond 1Q2023, as presently estimated, could further worsen food supply leading to sharp inflation in prices.

·         Further deterioration in international relations and persistent Sino-US trade war could accelerate central bank demand for gold.

The government on its part has outrightly denied any power or coal crisis in the country. The concerned ministry and related officers have also assured availability of adequate coal stock.

Not surprising, the power sector has been one of the most favorite sectors with investors in the past few months. The stock prices of the power sector companies, encompassing the companies in the business of power generation, power transmission, power distribution, coal production & import, and power trading, have done materially better. In particular, stocks of the companies focusing on renewable and clean energy have performed remarkably.

Surprisingly though, the stocks of power backup companies, including generators, inverters and batteries, have done very badly in recent months despite frequent power cuts.

My understanding of the situation is as follows:

·         Presently the total installed capacity of power in India is 399.5GW. Out of this 59% (236.11GW) capacity is thermal (coal and gas based); 13% (57.5GW) is hydro; 26% (105GW) is renewable (Solar – 54GW, Wind – 40GW and Biomass – 11GW) and rest is nuclear (6.8GW).

·         In the past one decade, most of the new power generation capacities have been installed in the private sector. The addition to the nuclear capacity has been dismal despite the civil nuclear deal having been executed in 2009. The new addition to thermal power has considerably slowed in the past 4years as more and more investment is getting committed to clean sources of energy. The hydro generation capacity is also stagnant, perhaps due to environmental concerns.

·         The current daily demand for electricity is about 191.8GW, less than half of the installed capacity. The current supply is 186.6GW, resulting in about 5.2GW of shortages. Obviously it is not the paucity generation capacity which is responsible for power shortages. It is obviously the availability of fuel (coal & gas for thermal and water for hydro) that is hindering the power supply.

·         Failure in implementing reforms in the coal sector; failure in securing adequate gas supply for gas based plants; failure in securing adequate supplies for nuclear energy; are some of the primary reasons for the frequent power crisis.

·         We have committed to very ambitious clean energy targets. This definitely requires meticulous planning and execution of the transition from the legacy power generation structure. There appears to be a huge lag in managing the transition. The focus appears to have completely shifted to the 2030-2040 clean energy goals. Not enough planning seems to have been done for the transition period (2022-2030) requirements. The consumers are obviously suffering.

(All charts and Data sourced from the National Power Portal)