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International coal prices seen soft on higher availability

June 23: Excess availability of coal with miners and lower than expected demand from China and India are likely to keep coal prices soft in international markets in coming months, industry sources in India feel.

“A lot of miners in countries like South Africa, Indonesia and Australia had gone for expansion in their mining capacities during last two-three years in anticipation of higher demands from countries like India and China, but the demand is not growing the way it was expected and that has led to increased availability of coal, particularly steam coal, in the system,” a source said.

“The miners had opted to increase capacity as they felt that it is better to go for economies of scale and play in volume to increase their profits despite margins being lower. Now that they have opted to avail the benefit of economies of scale, the availability of coal has increased significantly whereas demand did not grow as per anticipation,” said another source.

In between, it has been found that the expected demand for imported coal from main consuming countries like China and Japan is not growing in the way it was projected to grow.

“They (China) are finding is more beneficial to use domestic coal as prices are lower compared to imported coal. In addition, the thermal power generators in China are to some extent under pressure to reduce the price of electricity as hydro generation has improved significantly,” said a source.

The situation is not that different in India where, power demand did not grow as per expectation due to slow growth in economy during the past two-three years.

“Following the slow growth in economy and also because of issues related with distribution companies (DISCOMS), many power plants in India are being forced to operate at much lower capacity than normal 85% capacity utilisation,” said a government source.

Even as prospect of any significant jump in coal demand growth in China is not encouraging, many in India feel that with new government that has come to power recently, the industry activity would be back on track in next two-three months.

“This will lead to increase in demand for power in India and consequently the demand for coal, especially imported coal, as issues related to increase in domestic production such as delay in getting clearances, infrastructure bottlenecks continue to plague the country,” a source felt.

However, a section within the industry feel that the ground realities may not change much in India unless the new government opts to remove the structural hurdles related with power sector.

“Today coal fired plants are forced to buy coal at three-four different rates. While a section of power generators are getting coal at notified price, some others are forced to buy coal from e-auction, the price of which is at least 30% higher compared to notified price. Then there is third type of generators, who buy imported coal at higher, while the fourth type of generators depend both on imported coal and e-auction as they do not have any linkages . There is one more type of coal-fired power generator in India who buy 70-80% coal from domestic suppliers and the balance from international markets,” an industry source said.

“Unless these issues are sorted out, one can assume that the demand for imported coal or for that matter the domestic coal would not rise significantly,” the source added.