Some sharp moves, some luck see India ride surge in global energy prices

Boom in prices has been on for over a year, may not only to sustain but become more pronounced going ahead say experts; Indian economy has felt the heat, but has so far escaped being singed

Despite the world energy commodity prices being on fire, India is unusually better off this time for having pursued some energy-efficient tactics during the past few years. The economy has felt the heat from the price rise, but has till now managed to escape being singed. 

The energy commodity boom in prices, as the table shows, has been on for more than a year. Analysts for every one of those commodities, ranging from coal to lithium, agree these prices will not only remain high but could be higher still for at least another couple of years. The LNG price index, for instance, has climbed to $1,108 per mmbtu in two years. Crude at $211.24 per barrel and natural gas at $215.5 per mmbtu are equally stratospheric. 

This is new terrain for the Indian economy, which has been badly hurt each time commodity prices, especially those of oil, rose in the past. The picture has changed as policies have become smarter in some cases, while plain luck has played out in others. Among the former is the government's decision to push for import substitution of coal. In the current financial year, coal import has come down by 36 per cent from the 249-million-tonne level recorded in FY20, the year before Covid. Coal is India’s third largest commodity import at just a shade under 5 per cent after crude oil, gold and then petro products. For the past two years, the government has been pushing the coastal power plants which almost entirely depend on coal to substitute domestic coal. They have cut their import dependence by a staggering 41 per cent for the April to December period. 

As Indonesia continues with its restrictions on coal exports in January, the coal substitutions are the reason why domestic power plants are not in crisis again as they were in September last year.  

The other is the signaling. In December, India along with the US, Japan and South Korea released oil from its strategic petroleum reserves (SPR). While the US released 50 million barrels, India was able to offer far less, at about six million. As expected, global prices did not soften, but the oil producing nations took note. This January, Saudi oil minister Prince Abdulaziz Bin Salman said it was President Biden’s prerogative to decide on release from SPRs. It was clear to them that the major international buyers are now acting in concert and will be putting more pressure to keep prices in check. India envisioned an SPR in 1998 but it was only in 2018 that the first consignments from UAE for the Mangalore underground strategic storage flowed in. India signed a contract with UAE’s ADNOC to lease out a part of the Mangalore storage for storing oil and offered liberal tax concessions to build those. The combined capacity of the reserves shall soon be 11.3 million tonnes and plans to expand those further are on. 

There is further help from the futures market for oil and gas launched by UAE last March. Started in partnership with the Intercontinental Exchange (ICE), the market mechanism, instead of being a cartelised pricing that Opec practices, is giving Asian mega buyers like India more space to capture value from the trade. 

The more significant developments are in renewables (RE). Experts like this World Bank commodity report says oil prices could drop to $65 a barrel in 2023 as “demand is expected to continue its recovery and reach its pre-pandemic level by the second half of 2022”. While the same report is sanguine that RE input prices shall ease up, most other reports are gloomy. Benchmark Mineral Intelligence, a market intelligence publisher for the lithium ion battery to electric vehicle supply chain has published reports of the heightened race for securing assured nickel and lithium supplies by companies like Tesla. 

For India the preferred supplier for nickel remains Indonesia. While here too, Jakarta has turned inward, it retains a strong economic relationship with New Delhi. At India’s request the country agreed to take on the G20 presidency in 2022 which was otherwise India’s turn. Indonesia being a critical supplier of non ferrous minerals helps India, both geographically being a neighbour and economically, well connected. 

Another key reason for India’s safe harbour status in RE is the already achieved low prices reached by RE developers for their output. Price increases for the economy could be manageable from such a low base. A Crisil report released this week notes India’s solar module manufacturing capacity will rise almost 400 per cent by FY25. The additional 30-35 GW of fresh modules will be supported by favourable policies, likely improvement in energy efficiency and price competitiveness.

Even if prices of key metals such as lithium, copper and nickel harden globally—demand for copper demand is projected to rise 16 per cent by 2030 compared with a supply forecast showing a 12 per cent decrease in 2021 levels—Ankit Hakhu, Director, Crisil Ratings is sure there shall still be an advantage for domestic module manufacturers because they can offer better control over the supply chain to the RE developers and “timely supplies compared with imports”. Chinese made modules are up to 20 per cent cheaper in India but this picture could change soon. It is one of the reasons why tariff quoted by the RE developers are not moving northward. 

Energy Commodity Price index

Commodity	Jan 21	Jan 22
Coal, Australia ($/mt)	230.26	269.33
Crude Oil, Brent ($/bbl)	169.50	211.24
Natural Gas, US Henry Hub ($/mmbtu)	205.00	215.50
LNG, Japan/Korea marker ($/mmbtu)	297.30	1,108.12
Copper ($/mt)	150.60	157.90
Platinum ($/toz)	124.60	112.00
Nickel ($/mt)	134.18	162.92
Zinc ($/kg)	123.58	154.15
Lithium	140.40	461.70

Source: World Bank Commodity Report & latest exchange data