KOLKATA: ICRABSE 0.03 % expects aggregate domestic coal demand growth to witness a structural slowdown on the back of government’s large renewable energy capacity addition plans.
Government’s renewable plan includes taking the capacity to 175 GW by 2022 from the current capacity of around 58.3 GW.
Over the years, the capital cost of setting up renewable energy capacity has steadily declined, and the narrowing differential between conventional energy and renewable power tariffs has emerged as an underlying theme, with the story culminating to a low tariff of Rs 2.44 per unit at the Bhadla solar park in Rajasthan.
A greater parity between conventional and renewable energy tariffs, coupled with the current thermal overcapacity, will lead to a perceptible slowdown in fresh investments in setting up coal-based generation capacities in the next five years in ICRA’s opinion. This is likely to usher in a prolonged period of subdued demand of thermal coal for domestic miners.
“In our base case scenario of renewable capacity reaching 125 GW in FY2022, ICRA expects domestic coal demand to register a modest compounded annual growth rate of around 3.5% between FY2018 and FY2022, as against 5.6% registered between FY2013 and FY2017. Reflecting the above trend, CIL’s ambitious coal production target of 1 billion tonne in FY2020 is likely to be missed by a wide margin” said Jayanta Roy, senior vice-president, and group head – Corporate Sector Ratings, ICRA
Notwithstanding the anticipated slowdown in average annual coal demand in the next five years, domestic coal production is likely to grow by a higher compounded annual growth rate (CAGR) of around 5.5% between FY2018 and FY2022, leading to a significant reduction in India’s coal imports. “As per ICRA’s estimates, thermal coal imports are expected to contract to below 100 mt in FY2022, declining from 149 mt in FY2017. A gradual replacement of imported coal by domestic coal is expected to help domestic miners to an extent,” said Roy.
Global thermal coal prices have rallied by 36% since May 2017, largely driven by a jump in imports by China. However, ICRA believes that the drivers of this recent price rally are not long-lasting in nature, and have resulted from unexpected seasonal and temporary aberrations.
Chinese domestic coal production had seen a setback during April to November of CY2016 on account of the Government’s direction of cutting down the number of working days in a mine from 330 to 276.
However, the subsequent rollback of this directive in November 2016 has helped Chinese coal production steadily increase to earlier levels, which is expected to gradually reduce China’s thermal coal imports going forward. Given the expected lower imports from both India and China, the current buoyancy in seaborne thermal coal prices looks unsustainable in the medium to long term. A weak outlook on seaborne thermal coal prices is likely to adversely impact the domestic e-auction coal prices as well, benefiting end-users in the power, cement and sponge iron sectors, as well as companies with captive power plants.