Can Indian coal production match a rapidly growing demand?
Image: Coal. Credit: Lukasz Dylka (link below)
The global seaborne trade of coal totaled close to 1.2 billion tons, and constituted 24 % of global dry bulk volumes in 2015. The seaborne trade of coal is thus a vital commodity for the dry bulk industry and the growth in the trade of coal has a big impact on vessel earnings. In this series, we will look at global developments of the coal trade, focusing on a new region each week. Last week we looked at China. This week we will take a closer look at the biggest drivers affecting the seaborne imports into India.
Indian coal imports more than tripled from 64Mt in 2010 to 194Mt in 2014 as thermal generation grew at a rapid pace, while the growth in domestic coal production remained low.
The demand for coal continued to grow in 2015 with thermal generation up a healthy 6%. However, in 2015 the growth in domestic coal production was even higher at more than 8%, the highest growth rate in at least 11 years. With production growth exceeding consumption growth, imports started to decrease and was down 16% Year on Year (YoY) in the second half of 2015.
Imports continued down in the first 5 months of 2016 (-10% YoY), but imports in June and July were back in growth territory (+14% YoY). Although thermal generation growth has slowed in recent months and was close to zero in September, the growth Year to date (YTD) September has accelerated to +9%, up from +6% in 2015. The growth in domestic coal production has nosedived in recent months. In August and September, the YoY production growth was negative with -6% and -10% respectively. This has brought YTD coal production down to a meagre +2%.
Why has domestic coal production growth slowed from 9% in 2015 to 2% in the first 9 months of 2016? Has the domestic production reached logistical bottlenecks? Have the low hanging fruits in terms of production gains already been picked? Or is it a deliberate slowdown in production in order to bring down coal stocks? News were released late in September that the Indian government will try to eliminate import of coal by any state government or state discom in the next 3-4 months in order to tackle the current oversupply. This is certainly a bearish factor for demand in the short term, but private importers are likely to remain active.
We are confident that Indian demand for coal (both thermal and coking) will continue to grow at strong pace in the coming years. India’s coking coal reserves are very limited so the coking coal import will grow in line with the growth in steel production. Thermal generation demand will grow on the back of an expanding economy. Going into 2017 and the years beyond, we believe the single most important driver for seaborne coal imports into India will be the highly unpredictable growth rate in domestic coal production.
Next week we will have a look at the coal market in what we call Stable Asia (Hong Kong, Japan, South Korea, and Taiwan) and Emerging Asia (Bangladesh, Malaysia, Pakistan, Philippines, Vietnam and Thailand). The group of economies within Stable Asia is by far the largest coal import group today, but imports has (as indicated by our label) been very stable in recent years. The coal import into Emerging Asia is coming from a low base but will grow considerably going forward.