Coal Prices in India

The Indian economy is so dependent on the black gold, that the government predicts a rise in its consumption by around 50% in the coming years. The government has been steadily making strides towards a more market-based pricing approach and a freer coal economy than what we see today. This is apparent by the various market friendly policy decisions taken by the Modi government which will result in a freely flowing coal economy in the coming future:

1. Continuous auctions on rotational basis of coal mines for commercial mining with market linked pricing. Mines are continuously being added to the existing auction pool and auctions are being continuously being held by the government to keep investor interest strong in a bid to attract FDI to the space, along with domestic interest.
2. They’ve recently allowed captive mines to sell 50% of their production in open market. This landmark policy change has the potential to unlock more availability of the fuel to the industry, with market linked pricing thus increasing supply sources and hence deepening the market.
3. Coal India Ltd has been selling more and more coal being via the auctions route through MSTC and Coaljunction. Government through this is hitting two targets with one stone by not having to subsidize energy costs of industries, which sell their product on market linked prices, often making a killing, via long term, under-priced linkages. Secondly, this has resulted in the company realising much better prices and increasing its revenue.

Coal is a massive, 150 Bn $ sector in India. It is more than 5% of the Indian GDP. Our current consumption of almost a billion MT is met mostly by domestic mines operated by government-controlled Coal India Ltd and Singareni Collieries Coalfields Ltd and rest almost 25% via imports from various countries across the globe. Our major importing partners include Indonesia, South Africa, USA, Australia, and Russia. 

Coal Price Dynamics from the Global Trade to Local Indian Trade

Coal is a very cheap commodity (usually). The main part of the costing of coal, which forms up to 90% of the plant delivered cost to a consumer, constitutes of handling and transportation. This makes it very sensitive to location of mining and location of final consumption. The cost of mining constitutes of a mine preparation or overburden removal cost, which is usually a long term cost and rest is the running or operating cost of a mine. Together the two costs account for the cost of the coal at pithead. 

Apart from the cost of coal mining the most important determinant of pricing of any coal quality across the world is demand and supply dynamics of its market and overall energy spectrum movement in gas and crude prices. International demand-supply, geography, geopolitics, and region specific seasonality together play instrumental role in guiding prices in the international trade. These price movements are reflected in various accepted & traded price benchmarks including API2 (basis 6000NAR) for the ARA region on Europe, API4 (6000 NAR) for the South African varieties and M42 (4200 GAR) for the Indonesian coal. Similarly, movement in the Baltic index, which gives an indication of the freight price movements, is another major factor. Together they dictate the landed CIF price of different varieties of coal across India’s ports. 

Apart from this, distance of the exporting country from India is a major deciding aspect, cargo from a US NAPP region takes about 45 days to reach India, whereas a cargo from Indonesia reaches us in just 7-10 days. Due this wide gap in time risk involved cargo from far off only comes in larger vessels, to reduce per MT freight cost, while has the flexibility when coming from nearby places. This introduces a wide range of arbitrages for different industries to exploit all the time and premium differentials that different players are able to charge from time to time.

Let us look at the Indian landscape of the coal trade. In India, coal industry is almost 200 years old and is very deeply percolated and widespread across the length and breadth of the country. It is a freely tradable and importable commodity in India, with no licensing requirements of any type. Since there is no restriction, the lucrative trade is highly fragmented and has come to include a wide variety of trading companies of all sizes catering to different geographies, requirements and niches leading to very vibrant eco-system. 

In terms of trade dynamics the imported and domestic markets are different in their behaviours with some overlaps. When an imported coal vessel arrives or is bound to arrive in the country it is mostly pre-sold by the importer to a few larger distributors/traders at a small premium, thus offloading part of their risk onto them and getting money for subsequent cargoes in the pipeline. The terms most frequently chosen are 10% paid upfront by the distributor as an earnest money deposit (EMD) as confirmation against the deal and rest is given a period of 90 days from the date of arrival of the cargo on Indian port, on a cash and carry basis. Adding further premium to it, this cargo is then offered to mid-sized traders and mid-sized end user companies, like paper mills, dyeing units, chemical processing plants etc, by these distributors. The cargo then gets further sub-divided among smaller traders and subsequently to SME’s, where the smaller traders have add a premium for their various services and value adds. 

During all this there is further volatility in prices owing to different delivery locations, transportation charges and differences in preferred delivery dates of different industries. The large trader pools existing in the entire trade act as a offline hedging mechanism for the entire ecosystem, albeit in an inefficient manner. They take care of the cost of carry, ensure quality of product getting delivered and providing working capital finance to the cash starved SMEs in the process. 

There is a huge role of season like monsoon in India in the coal prices movement. Most of the industries go very slow during the monsoon seasons and some completely close like the brick kilns of North India. Some industries stock up before the monsoon season, like steel mills of Goa and most go very slow due to off-season like cement and dyeing industries in North India.

Major festivals like Diwali and Chhath also see an annual migration of majority labour force back to villages of Eastern UP and Bihar. This implies a labour shortage across North India and hence a slowdown in the industrial output and hence demand. This in turn has a sobering effect on coal prices in India, with liquidity in the industry becoming very low.  

Domestic coal mines are mostly located near the central, eastern and south eastern parts of the country. They are operated mostly by Coal India Limited (CIL) via its numerous subsidiaries including: 

1. Northern Coalfields Ltd, NCL
2. Central Coalfields Ltd, CCL
3. Eastern Coalfields Ltd, ECL
4. North Eastern Coalfields Ltd, NECL
5. South Eastern Coalfields Ltd, SECL
6. Western Coalfields Ltd, WCL
7. Mahanadi Coalfields Ltd, MCL

Apart from CIL, Singareni Collieries Coalfields Ltd, SCCL is also a state-owned coal mining company supplying to the Telangana and Andhra Pradesh markets. 

These regional supply sources have attracted huge coal buyers like steel industry clusters of Chhattisgarh, ferro alloy manufacturers in West Bengal, aluminium smelters in Odisha etc, apart from smaller industries like dyeing, brick kilns, paper mills etc peppered across the landscape to take the locational advantage of the locally available coal and have set up shop and generated massive employment and created wealth. 

In these places coal prices are usually guided by Coal India Limited’s notified prices. These prices remain largely static, unlinked to market realities. They are usually only modified on account of large one sided movements in the international prices and are always very slow to react. Almost 20% of entire production of Coal India Ltd is sold via e-Auctions, which almost always yield much better prices for the oligopoly. This % has been lately increasing with the government now realizing that being market linked has been one of the main reasons for China to become a global superpower. MSTC and Coaljunction are the two platforms authorized by the government to conduct the e-Auction of coal for the various subsidiaries of Coal India Ltd. 

The various subsidiaries of Coal India Ltd come out regularly with auction of coal from various mines of different grades from time to time. Domestic coal prices in India, depend on the frequency and timing of the e-Auctions and in some places the pricing of imported coal plays a deterministic role. 

Presently, captive mines allotted to various end coal user companies including power plants, cement plants, steel companies etc, have been allowed to sell up to 50% of their production in open market, which are expected to deepen the free market further leading to better coal prices in different Indian markets. 

Apart from this majority of coal belts across India are overlapping with coastline leading to extensive arbitrage opportunities naturally being existed across them.

South Africa is the 2nd largest exporter of coal to India. India has been its largest market accounting for over 50% of its total exports. Grades of RB1 (6000 NAR), RB2 (5700 NAR), RB3 (5500 NAR) and 4800 NAR are exported from South Africa into India. This coal is used across India mainly by sponge iron makers and ferro alloy manufacturers. It is utilized for its high fixed carbon content almost as a chemical. It directly competes with domestic varieties in south and south-east India. 

US coal has the best net calorific value of any coal in the world. Originates from the regions of North Appalachian and Illinois Basin in US. It has been a favourite of the brick kiln owners across the entire northern belt of India. Cement manufacturers across the country have used US coal interchangeably with petcoke, a refinery by product, basis on pricing arbitrage, whenever available. Paper mills up north have also been occasional users, whenever domestic coal has been in shortage.

Australian coal is mostly used by the cement industry, which act as swing buyers. This has also been often used by power plants across the coastline, whenever there is an arbitrage opportunity.

With increased visibility of live prices and reliable benchmarks arbitrage available to various SMEs via platform of CoalShastra, interesting and newer interplays of domestic and imported coal are being played out in various regions of North India. In markets of Punjab, Haryana and Western Uttar Pradesh which have traditionally used imported variety of coal from Indonesia and USA in various industries spanning brick kilns, dyeing units to leather tanneries, sugar mills etc, now even domestic coal from ECL, NCL and CCL are being sought for running their industries. These newer opportunities let the industry consume the most efficient energy products available, thereby actually reducing the over carbon footprint due to technology.

All said, the question of coal prices in India and its various dynamics is a complex one with various factors affecting the same in multitude of ways.