After the prices of coal bucked the trend and declined sharply over last few weeks leaving industry experts startled, the sector hope of prices easing in the near future, but a coal export duty by China can spoil the party.
The prices of domestic raw coal across various grades range from Rs 450 a tonne to Rs 2,200 a tonne. The last time prices of coal were revised by 10% in 2007.
Steam coal prices at Australia, a benchmark for Asia, snapped a five-week losing streak last week, rising from $7.74 to $163.90 a tonne.
?Last one month there has been moderation in prices of coal. People are expecting coking coal to drop to $250 per tonne next year and thermal coke to $110-$115 per tonne. Now with certain reduction in demand there will be moderation for sure,” said Ernst and Young Partner Navin Vohra.
?A lot, however, depends on the demand from the Chinese. China from an exporter of coal became an importer and if the demand continues to remain high in China, moderation will only happen in the 2010-11 period,” Vohra said.
The Indian coal industry is the fourth largest in terms of coal reserves and third largest in terms of coal production in the world. The country, however, faces huge deficit of coal.
Coal requirement for the power utility is expected to grow at a CAGR of around 10% during 2007-08 to 2011-12. High coking coal demand by the Indian steel industry and low reserve base is expected to boost the import of coking coals.
India imports 26 million tonne of coking coal and India?s coal demand, both thermal and coking, may rise to 1.87 billion tonne a year by 2026, ministry of coal joint secretary K.S. Kropha said on March 5. The nation?s usage of the commodity is expected to rise 54% to 730 million tonne a year by 2012, according to the Planning Commission, while its imports have doubled in the past 10 years. The country?s largest coal producer Coal India Ltd (CIL) aims to produce 520 mt of coal by terminal year of the XI plan period (2011-12) at a growth of 8.2%.
This, however, not sufficient as the country will have to resort to high imports, both for its thermal and coking coal needs. Effective Wednesday, China would impose an export tax of 10% on thermal coal, pushing up international prices and giving Australian producers a stronger hand in upcoming contract negotiations. The Australian producers will now have an edge in upcoming contract negotiations with Japanese and South Korean utilities, which in turn will drive up prices of coal across the board.
China also raised the export tax on coke to 40% from 25%, and on coking coal to 10 % from 5%.
International prices are expected to surge as China exports nearly half of the world?s coke and analyst estimates China?s coke export price could hit $1,000 a tonne, up from $700 a tonne currently. China exported 8.3 million tonne of coke in the first seven months of 2008 and has issued a total 12.01 million tonne of export quotas for 2008. Morgan Stanley, in a note to investors, said that the recent price caps could worsen the coal supply gap. If the caps are fully enforced, smaller mines might actually ?stop coal production until the price cap is removed at the end of 2008 with an expectation to sell at higher prices later.” Vohra said such measures to rein in inflation by the Chinese at home would be counter productive and would lead to exporting inflation to other countries.
Minister of state for Coal Santosh Bagrodia recently said the coal sector was committed to keep inflationary pressures at bay and CIL and its subsidiaries would not resort to any increase in prices of coal. However, a directive to wash all coal produced at pithead is expected to come into force soon. This is expected to drive up prices. The present cost of such beneficiation works out to Rs 15 crore per million tonne of raw coal, with a yield of around 80% of clean coal and 20% rejects.
CIL and its subsidiaries plan to wash about 100 mt of coal which will translate to a cost of about Rs 1,500 crore. The investment requirement for setting up a washery will vary from Rs 400 to Rs 600 per tonne of annual capacity. It will mean Rs 4,000-6,000 crore to set up a coal washery.
This means the cost of producing washed coal increases substantially and can translate into higher cost of coal for the end user. An official at the Indraprastha Power Generation Co Ltd (IPGCL) said CIL is already providing washed coal at a premium of Rs 300-400 per tonne compared to raw coal.
India?s penchant for coking coal, spurred by the expansion of the steel industry is at an all time high. Prices for coking coal tripled to a record $300 a metric ton this year as floods in Australia?s Bowen Basin cut output from mines, including those of BHP, and power constraints in China and South Africa limited supplies.
Prices may rise to $350 a tonne next year on supply pressures and rising demand from steelmakers, Macquarie Group Ltd has forecast. ?Coking coal deficit still remains high,” Vohra said.
Domestic production of prime grade coking coal was limited to about 15 million tonne. India will have to import nearly 200 million tonne of coking coal as it plans to increase steel production to 200 million tons per annum by 2020. Out of the total proven coal reserves in India, 13% comprises coking coal and the remaining 87% is non-coking coal. However, the coking coal found in India is characterised by very high ash content
Australian mining giant, BHP Billiton Mitsubishi Alliance (BMA) said India is now the second-largest buyer of coking coal, which sold 9.7 million tonne to the country last year, ?We are more certain of the demand emanating from India. India?s rapid urbanisation is driving steel consumption, yet India has insufficient metallurgical coal to meet its own requirements and therefore imports most of its needs,” said BMA chief financial officer Michael Lambourne recently.