Coverstory

Coal Deficit Widens on Rising Demand

sed as a primary means of fossil fuel spread widely between a large number of kitchens to steel production furnace and power plans, coal is a major source of energy for all strata of Indian consumers. In mine bearing areas, coal is used as the only source of coking medium and most of the residents around the minesite survive on this black diamond. In distant Indian states, however, coal is used as a means of power generations for both industrial and domestic consumption.

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The Industry
The Indian coal industry is the fourth largest in terms of reserves and third largest by production in the world. Coal is one of the primary sources of energy, accounting for about 70 percent of the total energy consumption in the country. Coal deposits in India occur mostly in thick seams and at shallow depths. Indian coal has high ash content (15-45%) and low calorific value. With the present rate of daily coal extraction in the country, the reserves are likely to last over 100 years. India's coal production is forecast to increase to 554 million tonnes in 2012, more than the 533.12 million tonnes the country produced in the previous year.

Deficit Continues
Despite its huge resource base, till date, India has not been able to minimize its coal deficit. A recent survey conducted by Research and Markets suggest that the demandsupply deficit of coal is estimated to grow at a CAGR of 17.2 percent till 2017. Exploration, technical, environmental and logistical issues have forced India to import the commodity. Coal has been recognized as the most important source of energy for electricity generation and industries such as steel, cement, fertilizers and chemicals are major sectors of coal consumption. So in order to satisfy the coal demand, the Indian coal industry needs more investment and private players to raise its production level. The coal washery have to take bigger role in the industry to produce less moisture and ashbased coal to sustain in strict environment regulations. According to the Indian coal ministry, imports of coal are expected to increase to 80 million tonnes from 69.76 million tonnes last year. Market experts believe that the rising trend to import coal will ultimately force the steel companies to increase prices. The government has upped the figure of its estimated coal shortage, expected by March 2012. New estimates now put the coal shortage at 112 million tonnes, up from 83 million

tonnes forecast in December 2010. The entire shortfall is likely to be met by imports. Besides blending requirements, superior quality parameters and converging price trends of imported and domestic coal would lead to more imports. Indian companies have acquired overseas coal assets in Mozambique, Indonesia and Australia, but more efforts are required to reduce the coal imports. The government has taken some steps to reduce the demand/supply gap. A new policy being drafted for auction of coal blocks is among the various other steps that are being taken to mitigate the shortfall. The coal ministry has been working on the auction policy that will replace the existing system of allocating blocks for over a year.

Demand and Price Rise

Ministry of coal estimated coking coal requirement in the country is likely to rise by 22 per cent during next fiscal year due to growing demand from steel industry. Coking coal requirement for steel production is expected to be 85.34 million tonnes in 2011-12, as steel production is dependent on coking coal. The domestic steel industry is expected to use about 70 million tonnes of coking coal in the current financial year ending March 31. The country is likely to produce about 65 million tonnes of steel in the current financial year. India meets about 70 per cent of its coking coal need through importers from countries including Australia, Indonesia and the US. The thermal coal requirement for power utilities, would

With major Indian steel manufacturers like Tata Steel , SAIL and other players to experience a drop in coking coal supplies, an important raw material used in steel production, cuts in the metal output and raising of prices are expected. April-to-June quarter supplies of coking coal is expected to whittle down taking toll on production. India's coking coal imports may triple by 2015. India's coking coal imports will go from current 30 million tonnes to 90 million tonnes by 2015 surpassing Chinese coking coal imports. By comparison, China coking coal imports may be at most 70 million tonnes by 2015. The coking coal demand will be driven by India's growth in steel output which is seen to grow at 10% clip for next 10 years. Coal import in India has worried the country's steelmakers, which are already under pressure from the rise in iron ore prices and coal prices.

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also grow at 10 per cent during the next financial year (2011-12). As a consequence, prices are expected to remain upbeat throughout this year. the Australian Bureau of Agricultural and Resource Economics Bureau of Rural Sciences forecast in September last year that hard coking coal prices may average around $200 a tonne in the first half of 2011, representing a six percent increase on the 2010 average. For 2010 as a whole, hard coking coal contract prices will average $191 a tonne. In early September, high-quality hard coking coal contract prices for the last quarter of 2010 were settled at $209 a tonne, a seven percent decline from the third quarter. Growth in world trade of metallurgical coal, particularly in the Asia-Pacific region, is forecast to increase over the remainder of 2010 and into 2011, with higher exports from Australia and Canada. World trade is set to increase by 14 percent to 241 million metric tonnes in 2010 and by a further eight percent to 260 million

metric tonnes in 2011. Import demand growth will mainly come from developing Asian economies, particularly China and India. In 2010, imports by China, which increased by 386 percent in 2009, are estimated to rise by a further nine percent to 37 million metric tonnes. China's imports in 2011 are forecast to increase by a further 19 percent to 44 million metric tonnes. The agency estimated India's imports of metallurgical coal to increase by 13 percent to 26 million metric tonnes in 2010 and by a further 15 percent to 30 million metric tonnes in 2011. Underpinning these increases is forecast growth in India's steel production and limited domestic metallurgical coal supply.

KEY HIGHLIGHTS
l Coal

requirement for the power utility will grow at a CAGR of around 10 percent

l Private

coal washery have rapidly increased the production of washed non-coking coal over a period of time

l High

coking coal demand by the steel industry and low reserve base has boosted the import of coking coals

l Demand

from the cement industry looks bright and it is expected that coal requirement by the industry will rise steadily

l Coking

Record Coking Coal Price

Against that forecast, coking coal price surged to $300 a tonne in the first quarter of the current calendar year due to supply disruptions caused by flooding over Christmas in Australia, the world's top exporter of the commodity. A jump in prices negotiated through contracts is expected to add further inflationary pressures in the steel sector, which has already been hit by record highs in the cost of iron ore. Anglo American, one of the top coking coal miners, has settled contracts for April-June delivery at $330 a tonne, according to a person familiar with the transactions. That is up 47 per cent

coal requirement in steel production is expected to touch over 85.34 million tonnes in 2011-12.

from the first quarter, and above the previous record of $300 a tonne in 2008. The contract system for the commodity has since then moved from annual agreements to quarterly deals. Increasing steel prices are adding to global inflationary concerns as food and oil prices are also rising sharply. The record contract price for coking coal is the clearest sign of the tightness of the market in the wake of the devastating floods in late December and early January that severely knocked output in Queensland, the Australian state that accounts for 50 per cent of supply to the global seaborne coking coal market. The size of the contracts settled by Anglo American was unclear. Nonetheless,

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analysts said the agreement on price was an indication that steelmakers recognised that they were facing a shortage of coking coal, making it likely that other quarterly contracts would settle at similarly high levels. The largest coking coal miners are the joint venture between BHP Billiton and Mitsubishi, the Japanese trading house, Teck of Canada, Anglo American, Xstrata and Rio Tinto. At least six major global coal miners have declared force majeure, which means they can miss contractual shipments because of circumstances out of their control. The list includes Anglo American, Aquila Resources, BHP Billiton, Macarthur Coal, Rio Tinto, Vale, and Xstrata. Mines responsible for between 100 and 140 million tonnes of annual coking coal production are now under force majeure, representing as much as 40% of global supply. Coking coal prices are set in quarterly negotiations between steelmakers and coal miners; contracts for the first quarter of 2011 were mostly settled before the floods, at an average of $225 a tonne (already the second highest level ever). So prices have not changed yet, but there is lots of talk about where they will go next. Analyst predictions for the second quarter range from $250 to $350 per tonne.

Effect on Steel Producers

With major Indian steel manufacturers like Tata Steel , SAIL and other players to experience a drop in coking coal supplies, an important raw material used in steel production, cuts in the metal output and raising of prices are expected. April-to-June quarter supplies of coking coal is expected to whittle down taking toll on production. The culprit is the floods in Australia. The continuing flood situation in Queensland has forced miners there to invoke the force majeure clause that would entail Indian steel manufacturers with lower supplies. This is in the face of steel demand growing 10% in India for the year ending March 31. The Australian coal industry is expected to lose AU$480 million a week in coal exports.

Meanwhile, Indian steel makers are trying to pump in more of coking coal from Canada and US. JSW Steel used to source 80% of its coking coal demand from Australia is now scouting Canada and US to hedge shortage of supplies. Local steel producers, however would opt for the stock piles they are having to fire furnaces which would likely result in low output figures of steel production in the coming quarter. January-March period is the time when demand for steel peaks in the markets. Steel Authority of India, India's second-biggest producer of steel, is shelling out 8% more, or $225 a tonne, for coking coal in the current quarter and the company has plans to import two-third of its requirements. Hit hard by the rising coking coal prices and wage bill, state-run Steel Authority of India Limited (SAIL) has reported a 29 per cent decline in its net profit at ` 4,914.29 crore during the year ended March 31, 2011, against `6,790.78 crore in 2009-10. During the year, the company produced 12.89 million tonnes of steel, while it was 3.43 million tonnes during the quarter ended March 31, 2011. This included the value-added steel production of 4.8 million tonnes in 2010-11. SAIL Chairman C S Verma attributed the fall in net profit to high coking coal prices and substantial increase in the company wage bill.

The Way Forward

The Australia and New Zealand Banking Group (ANZ) forecasts India's coking coal imports may triple by 2015. India's coking coal imports will go from current 30 million tonnes to 90 million tonnes by 2015 surpassing Chinese coking coal imports. By comparison, China coking coal imports may be at most 70 million tonnes by 2015. The coking coal demand will be driven by India's growth in steel output which is seen to grow at 10% clip for next 10 years. China's demand for coking coal is expected to increase by 180 million tonnes by 2015. And, coking coal output in North China's Shanxi province, the main production base for steelmaking material, would merely

gain 80 million tonnes, which may result in demand shortfall of 100 million tonnes, due to limited increase in other production provinces. According to reports of relevant government departments, it is estimated that China consumed 540 million tonnes or so washed coking coal for the production of over 380 million tonnes coke in 2010. Data from the National Bureau of Statistics, Shanxi produced 340 million tonnes of coking coal last year, contributing 34% of the total in China, showed. Other main production provinces, like Shandong, Anhui, Heilongjiang and Henan, witnessed limited growth in their coking coal outputs, due to depletion of the rare resources. With development of large sized blast furnaces, China's steel mills are increasing demand for premium coking coals that are low in ash and sulfur content but strong in caking property. The nation's demand for the steelmaking ingredient would continue

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