Check this mad rush

Coal has always been taken as the answer to India's energy problems. Over the last few years, India's dependence on imported coal has increased on the widening demand-supply gap and the low quality of domestic coal. Often, the shortage of coal has been blamed for losses of electricity generation, although production has increased rapidly over the last few years.

Given the trend, India will have to import more and more of coal. This will have serious implications. The country's power sector planning, specially on coal-based thermal power generation, needs rethinking. While the Planning Commission proposed thermal capacity of 70,000 MW in the 12th Plan (2012-2017), the ministry of environment and forests (MoEF) has already cleared 193,000MW of thermal capacity. Overall, 702,000 MW of thermal capacity is in the MoEF pipeline, and more than 80% of it is coal-based.

This scenario is worrying not just for the social, environmental and climate change reasons, but is questionable purely on the economic ground as well. Such mad coal rush might not have factored in the future coal market scenario. In the global market, the dynamics of coal price are influenced by a variety of factors, ranging from rains in Indonesia to world demand for steel. Steam coal prices are a function of various factors like supply-demand fundamentals, freight rates and other external factors. Of the total bulk trade, steam coal accounts for 20%, coking coal for 7-8%, iron ore 25% and other commodities for the rest. Since the bulk fleet is used for various commodities, a strong demand in one commodity would tighten ship availability and trigger a surge in freight rates.

Coal prices have been relatively stable during the 1990s and early 2000s. But prices started moving up since 2003 and followed the trend till 2008 when it crashed with the global meltdown. In the five years between 2003 and 2008, coal prices increased almost five-fold and crossed the $190-mark. Though Australian coal price hit the bottom of $65 per ton in March 2009, prices kept moving up since. All projections indicate a tightening of the global coal market in the long run and hence prices are going to rise.

China is the largest producer of coal while India is the third largest producer of coal after the US. But both China and India have significant import dependence on coal. Though India imported only about 20% of its requirements in 2010, with 90 million tonne of coal imports, it was the fourth largest importer with about 10% share of global trade.

According to some estimates, Indian coal imports hit the 100-million-tonne figure in 2010-11 and about 70% of that was of thermal variety. China's case is more interesting. It was a net exporter of coal till recently (2007), but is now the second largest importer in the world with about 20% of global share, though import constitutes only about 7% of its requirements. India's share in global coal market was less than 5% even in 2004. This clearly shows the kind of impact China and India made in the global coal market and in its price rise.

Geographically, the global coal market has two segments: the Atlantic and the Pacific. Main suppliers of the Atlantic market are: South Africa, Colombia, Russia, Poland, Indonesia, Australia and the US, while on the Pacific side the main suppliers are Australia, Indonesia and Russia. Import demand comes mainly from EU25 on the one side and from Japan, China, South Korea, India and Chinese Taipei on the other, with these countries altogether requiring almost 80% of globally traded coal.

Exchange between the two markets also happens depending on freight differentials. Australia, Russia and South Africa are geographically positioned in such a way that they can serve both the markets. For India, of course, the feasible options are Indonesia, Australia and, to some extent, South Africa, and the recent developments in some of these countries are not quite encouraging.

In Australia, the government is now trying to internalise costs to the owner of the resources, and to develop carbon mitigating measure, is introducing resource rent tax and carbon tax on mining certain resources like coal. In Indonesia, the government lays down more responsibility on the licence-holder and seeks to retain earnings/benefits from mining by setting a benchmark price for selling the resource. By law, community development is a responsibility of the mining permit-holder and local communities have a say in it. Of late, the government of Indonesia is moving towards resource nationalism and is demanding greater royalty and asking foreign companies to divest 51% stake to Indonesians over ten years. It is possible that someday countries like Australia may put restrictions on export of coal on climate change grounds, and may demand the use of carbon capture and storage (CCS) in importing countries.

There was a time when it was a natural choice for India to depend on coal to meet its rising demand for power. Coal was abundantly available and recoverable at low costs. Hence coal-based power generation was economical even though it has higher investment needs compared to, say, gas power plants. But availability of cheap coal would not have much significance when a large part of coal has to be imported at global prices. One reason for going coal was India's reluctance to increase its reliance on foreign sources. This reason will no longer remain valid. Reforms in the domestic coal sector will also not be of much help as some estimates show that India is likely to exhaust its coal resource over the next four decades. A part of the resources will anyway remain unutilised over social and environmental concerns. Given this, it would be prudent for India to reduce its dependence on coal and diversify its energy basket.