Coal India (CIL) reported 7% growth in coal supply to the power sector during FY18; yet, coal stocks at operational thermal power plants have remained low at only 10 days of requirement. Importantly, the number of plants with critical-level coal stock has zoomed to 28 as of Mar-2018, with distant plants in western and northern India witnessing greater shortage. This is driven by logistics constraints and not by lower production at CIL. Shift to roads and MGR for near pithead plants (to make rail capacity available for distant plants) along with ongoing investments in rail projects would help. But shortage at power plants may continue in the interim, especially if demand growth sustains. Also CIL’s offtake growth can remain healthy subject to logistic constraints as power plants build up inventory.
Inventories at major power plants still low
While coal inventories with top 114 power plants in India has increased to 10 days (16.2mt) now from the low of six days in Sep/Oct-2017, it is still low compared with 19 days at end-FY17 and 27 days at end-FY16. Despite CEA’s guideline of maintaining stock of 32mt or 22 days, thermal power plants ran down inventories to 11-12 days of requirement over last summer. This was before the sudden demand surge which created significant shortage at multiple power plants, given constraints to ramp up coal production during monsoons.
Notably, while stocks are at levels similar to Jun-2017, the number of plants which are now critical in terms of low inventory are much higher at 28 vs. one in March last year. This is essentially a reflection of issues in logistics in terms of rake availability or rail infrastructure capacity rather than any issue of coal production at CIL or Singareni Collieries Company (SCCL).
CIL not directly responsible for low inventories
During FY18, CIL increased its offtake by 6.8% (to 580mt) and production by 2.4% (to 567mt). Supply to the power sector grew 7% in FY18 to 454.3mt in FY18 vs. 425.4mt in FY17. For every month except Mar-2018, offtake was higher than production; this was owing to the company resorting to curtailing production amid a tepid demand scenario. Recognising the steady decline in inventory seen especially during and post monsoons in 2017, CIL stepped up production. In fact, Mar-2018 witnessed strong 9.4% growth in production to 72mt – the highest ever monthly production by CIL.
The company ended FY18 with inventory of ~54mt. This is largely similar to the levels seen at end-FY16. In our view, this is a healthy inventory level to maintain. Excessive inventory levels, as seen at beginning-FY17, would again create issues of poor coal quality and lower realisations, given enhanced focus on coal grade and shifting of pricing mechanism to actual heat content in the supply.
Logistic bottlenecks to blame
A granular analysis of power plant inventories suggests that there are no power plants with critical (less than 7 days) or super critical (less than 4 days) coal stock in the eastern states of Odisha, Bihar, Jharkhand and West Bengal, where most mines are located. Of the 29 power stations with critical coal stock, 16 are in the western states of Maharashtra, Gujarat, Madhya Pradesh/Chhattisgarh, while six are in the northern states of Punjab, Haryana and Uttar Pradesh, with the remaining seven being in Southern India. This indicates that transportation of coal over larger distances is an issue.
Multiple initiatives undertaken to resolve logistics issue
The government and CIL have undertaken various initiatives to improve transportation of coal. These include increasing rake availability for coal transportation, improving rail infrastructure for increasing evacuation capabilities, and investing in new rail lines. CIL targets supplying coal to all pithead power plants through roads and conveyor belts, with a view to freeing up railway rakes for long-distance transportation.
The Coal ministry has also proposed investment of Rs 200 bn by CIL over the next 5-7 years to own 1,500-1,600 rakes. Start of the eastern dedicated freight corridor in 2021 is also expected to improve rake availability. The government is also encouraging the use of coastal shipping and internal waterways to increase coal evacuation and reduce transportation costs. These measures are expected to increase coal availability.