India’s Struggle of Coal Crisis

  • by THO
  • 2 weeks ago
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India coal shortage crisis comes in-between world energy crunch due to sharp rise in demand across China, Europe, and other countries. Recovery of Economies from Coronavirus raised industries’ power demand which outstrips the supply of coal in the market.

India is one of the biggest coal producers globally with 12.68 exajoules, China being the biggest with 80.91 exajoules. Amid global coal shortage, China power demand shortage reached crisis level the previous month, which led to a cut in industrial and household use of coal. The shortage of supply in China and most parts of the world caused a rise in coal prices, affecting the power production of countries.


Sources: Tavaga Research (unit in Exajoules)

Key Reasons for Coal Crisis

Similar to China, India is facing two key problems: firstly, soaring demand for electricity due to a rise in industrial after pandemic restrictions were lifted and a fall in local coal output. The country meets around 75% of its total demand locally. Heavy rains caused flooding of mines and disruption of main transport routes. Coal India Limited (NS:) (CIL) is the world’s largest coal mining company and produces approx. 84% of India’s thermal coal. CIL has continuously reported failure in meeting its annual target. India’s dependency on CIL has proved to be a drawback as the demand vastly outstripped supply.

Impact of Coal Crisis in India

Even after being one of the largest coal producers, India needs to import a large amount of coal to meet its demand, one of the world’s largest importers of coal. An increasing price gap between record global coal prices and lower domestic prices has led buyers to avoid imports. It caused a fall in power production by thermal power plants using imported coal, increasing pressure on utilities utilizing domestically mined coal to cover-up fall in output. India has a total installed capacity of 388 GW or gigawatt, out of which approximately 55% is thermal or coal-based.

At the end of September, Coal stock in power plants of India fell to approximately around 8.1 million tons, which is almost 76% less than the previous year as quoted by the government. Coal’s average spot prices rose to more than 63% in September to INR 4.4 kilowatt/hour.

Another reason for price rise is more political. Coal India controls coal Prices in India. India’s power tariffs are one of the lowest in the world. The state-run power distribution companies have absorbed increased tariff costs to keep the price lower because a price increase will increase the prices of basic utilities and give rise to inflation. So, for a year, even when Asia’s prices were touching high, the government kept the coal prices lower. Due to this, companies suffered huge losses, and their cumulative liabilities running, accumulating up to billions of dollars. These companies have strained balance sheets which are because of continuous delayed payments to power producers. This has had a lot of effect on cash flows and disincentivizing investment in the power generation sector.

As per CRISIL (NS:) (a unit of rating agency S&P), it’s expected that Australian and Indonesian coal prices will increase over the remaining of this fiscal year due to a high increase in demand from China and other parts of the world. According to the report by Kplr, India’s weekly average coal imports dropped by more than 30% from the average of Jan–July of this year, nearly under 3 million tonnes, when global prices of coal rallied over 40%, recording all-time highs.

In his recent statement to the media, Union Power Minister, Mr. R K Singh said that though there is some expectation that the demand could start lowering down from the second half of October. However, the bridging demand of fuel gap is still likely to be a “touch and go” affair”. He said, “I can’t say I am secure… If you have 40,000-50,000 MW (of thermal capacity) with less than three days of stock, you can’t be secure” (told The Indian Express in an interview).

Looking at the situation,, we are likely to see an increase in power outages in many parts of the country in the coming next four to five months, while some regions have to pay a premium amount to get ample power supply. This rise in electricity bills will more likely put a dent in India’s growth rate. The situation may become better once the rainy season gets over, but the effect of shortage will probably exist until the start of the next year.

producing companies are one of the major power users facing a lot of difficulties in processing after government-run miners, Coal India, curbed coal supplies to heavy industries by prioritizing coal deliveries to power generation.

The cement industry will also be affected as 75% of their power and fuel cost are associated with coal. It will impact even big cement companies like Ultratech (NS:) and Ambuja Cements Ltd (NS:). Rising prices of coal and fuel (like petrol, diesel) can cause companies to shut down as their day-to-day operations will become costly. The threat of rising inflation and worsening fiscal deficit due to imports of fuel when the fuel costs are soaring high outside India have led to 14 basis-point increase in the country’s bond yield in the past two weeks’ time and a fall in the rupee to its lowest since April of this year.

On 5th October 2021, the government had allowed companies that are allotted coal and lignite mines for just their own use to sell 50% of their total annual output in a bid to ease shortages of coal supply. Coal India is likely to increase daily coal supply capacity to 1.9 million tons by mid of October from currently about 1.7 million tons, which can help to ease the current demand-supply deficit.

Effects on Market

The monsoon heavy that affected coal mines is likely to help increase hydropower generation. India’s Hydropower generation is the second-largest source of power after coal. Government regulation can help ease the prices in the short term, but the country will still take the next 4-5 months to recover from the coal crisis fully. The next few months will be critical for India’s economic growth as the government and industry will try to cope with coal prices. It will also impact the stock market, where we can see a rise in Steel prices benefiting steel-producing companies. Still, other sectors dependent on coal, such as cement and state-run power plants, will get negatively affected.



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