BMI View: Despite ambitious plans by the Indian government to boost domestic coal production, we expect the country's reliance on coal imports to grow over the coming years. A combination of obstacles with vital regulatory and bureaucratic hurdles being the most pertinent will continue to sap growth in the coal sector, while burgeoning demand for coal resources fuel an increasing number of Indian companies to embark on overseas ventures. With a stellar portfolio of coal deposits on offer, we believe southern Africa is well-placed to capture the bulk of mining investment from India.
In contrast to the growing popularity of renewable energy sources in many developed markets, we believe coal is set to gain increasing prominence in India's energy portfolio over the coming years. Unlike China which has witnessed massive shutdowns of coal-polluting mines in recent months, we believe the focus towards promoting the usage of greener energy is likely to take a backseat in India. Coal has been the cheap energy source for generating electricity globally and has helped power the rise of manufacturing hubs in Asia and much of the emerging economies. Electricity from coal-powered plants is not susceptible to the vagaries of w eather , and can more easily satisfy base-load demands without interruption. Despite boasting the world's fifth largest coal reserves, we expect India to import greater amounts of coal over the coming years due to the growing shortfall of domestic production. Coal consumption in India has continued to outstrip output over the past decade, to reach a structural deficit of 137mnt (million tonnes) in 2011.
|Structural Deficit To Stay|
|India - Coal Production, Consumption & Balance (mnt)|
Production: Unlikely To Keep Pace With Demand
Although state-owned miner such as Coal India Limited (CIL), which accounts for 85% of India's total coal output, has announced plans to boost production, we expect India to remain heavily dependent on overseas purchases going forward. In a bid to expand output for power generation needs, CIL is set to build a US$1.4bn railway link in the states of Odisha, Jharkhand and Chhattisgarh. The 327km (kilometres) network is expected to free up more than 330mnt of coal per annum upon completion in 2018. While we acknowledge that this project will provide a considerable boost to future output, we do not believe it will eliminate the country's reliance on thermal coal imports within five years, as proclaimed by CIL. Apart from the delays in environmental clearances, vital regulatory and bureaucratic hurdles, we believe issues surrounding infrastructure bottlenecks and the lack of high-end technology for underground mining will continue to hinder development in the country's coal sector. Indeed, Coal Minister Sriprakash Jaiswal has stated that coal production could increase by 15% if the issues of theft and corruption in CIL were addressed, and an additional 10-15% increase could be achieved through higher productivity.
|India's Coal Rush To Drive Imports|
|India - Coal Imports & Growth|
Privatisation Of Coal Sector A Tough Process
While we have previously highlighted that the privatisation of India's coal industry will be a catalyst to further investment and output growth, this is nevertheless a challenging process fraught with obstacles . For one, privatising of the coal sector stipulates the establishment of a regulatory body to sort out pricing issues as well as an amendment to the country's existing law. The fact that the 2011 Mines and Mineral Development and Regulation Bill (MMDR) has yet to be put to parliament due to conflicts over profit sharing schemes reaffirms our belief that participation of private players in India's coal industry will be muted over the coming years. In view of all these factors, we forecast India's coal production to reach 797mnt by 2017, increasing at an annual average rate of 5.5% from 2011 levels.
|Healthy Growth In Place, But Not Enough|
|India - Coal Production & Growth|
C onsumption: C oal To Retain Primacy
With 57% of its electricity generated from coal-fired power plants, we expect coal to retain its primacy as the country undergoes rapid industrialisation and urbanisation process. This is in stark contrast to western markets and in particular the United States, where the glut of cheap natural gas has knocked coal off its dominant perch as a source of fuel for power plants. According to the World Resource Institute (WRI), a pipeline of 455 power plants will be coming online in India over the next few years, almost 100 more than what China is preparing to build.
Besides strong demand for thermal coal emanating from the power sector, we note that growth in India's steel sector will further lift the consumption of coking coal used in blast furnaces. We forecast India's steel production to grow at an annual average rate of 9.1%, to reach 121mnt by 2017 and expect the construction industry to account for the bulk of incremental steel demand . Indeed, our infrastructure desk is expecting an improved environment for construction companies as the government makes pertinent efforts to remove bottlenecks that are delaying infrastructure projects in the country.
|India - Total Net Generation, By Type (TWh)|
More Companies To Secure Deposits In Southern Africa
Underpinned by our expectation that domestic output will be insufficient to cope with the country's burgeoning demand , we expect a swathe of Indian companies to venture overseas in the pursuit of coal mining assets. In this respect, we believe southern Africa is well-placed to benefit from India's increased coal demand. Mozambique hosts some of the world's largest coal reserves due to come on stream in the next few years, while Botswana and Zambia are home to world-leading undeveloped coal resources. Furthermore, the ongoing development of port facilities in the region will significantly enhance the ability to export coal directly to India. To highlight, Coal India Africana , a wholly-owned subsidiary of CIL, is planning to start coal production in Mozambique over the coming months following the acquisition of two exploration blocks in 2009.
|Bountiful Coal Deposits|
|Southern Africa - Map of Coal Deposits|
While parts of southern Africa are fraught with risks , we believe the trend of Indian investment into the region's coal sector is set to be a persistent one. This is especially when traditional sources of supply from countries such as Australia and Indonesia are vulnerable to further price hikes and policy changes in the coming quarters. The imposition of a 30% super profit tax on Australian coal miners could potentially increase the prices of India's coal imports, while the Indonesian government's plan to impose a quota system on coal production poses a salient risk to global supply. Indeed, any policy and regulatory changes in these two countries will have major implications on the global seaborne market. Australia and Indonesia command a high degree of pricing power in the coal industry as they account for more than 50% of global coal exports. Additionally, the recent political motivation by Rural Development Minister Jairam Ramesh to put a 10-year moratorium on new mining projects due to Maoist insurgencies in the eastern states of India further reinforces our conviction that more domestic companies will venture beyond their home market to secure coal deposits.