2023 could be another strong yr for coal as demand may reach record levels

Coal India, companies with captive coal mines in steel, power and other sectors will be at an advantage

 
 Global coal prices have seen wide swings in 2022 but they are ending on a strong note. The benchmark Newcastle contract is at $400 per tonne, about 145 per cent higher than December 2021. This is after hitting a record high of $457 per tonne in September, and suffering a drop to $320 per tonne in November. There’s consensus that coal consumption through 2023 will hit record levels due to gas shortages and uncertainties about supplies due to the Ukraine War.
 
“Coal markets have been shaken severely in 2022, with traditional trade flows disrupted, prices soaring and demand set to grow by 1.2 per cent, reaching an all-time high and surpassing 8 billion metric tons for the first time,” the International Energy Agency said in its Coal 2022 report last week.
 
While this is clearly a bad signal for climate change, it has multiple implications for India with its heavy reliance on coal for thermal generation and in the metals and cement industries. Under the circumstances, captive mines offer huge competitive advantage for power-intensive industries.
 
Coal India is looking to ramp up production, and taken together with captive mines, India could produce 900 million tonnes (MT) next year. Even so, imports of 200 MT plus would be required since consumption of coal is well over 1,100 MT. Around 73 per cent of 2022 power demand was met by thermal coal and 2023 is likely to see power consumption set new records.
 
About 93 per cent (959 MT) of the coal demand in 2021 was thermal coal (including lignite), used for power generation (757 MT). The rest was metallurgical or coking coal, which is used for steel production (75 MT). Demand for both types increased year-on-year (YoY) in 2022 by 14 per cent for thermal coal, and 13 per cent for met coal.
 

Producers like Coal India (CIL) and Neyveli Lignite, as well as companies like Tata Power, Hindalco and Adani Power -- which control their own captive mines -- could benefit. In addition, companies like NTPC, with fuel supply agreements (FSA) with CIL, will be better-placed. Companies, which have to import coal, or buy at e-auctions, will probably see cost-escalation. For the power sector, control of coal supplies or availability through FSA will be critical. For the steel industry, a rise in steel prices will be key to offsetting high costs.
 
CIL's capital expenditure has risen 33 per cent YoY in the first half of the 2022-23 financial year (H1FY23), with capex of Rs 7,027 crore on expanding coal evacuation infrastructure.
 
CIL’s production of 412.6 MT during April-November 22 was a YoY increase of 59.2 MT – growth of 17 per cent over production of 353.4 MT for H1FY22. The production target of 700 MT was 12.5 per cent over the last fiscal and it has to produce 288 MT in the last four months of the fiscal to achieve the target.
 
In Q2, CIL sold 141 MT of coal on FSA at realisation of Rs 1,414 per tonne and 10.4 MT on e-auctions at realisation of Rs 6,061 per tonne. It also sold 90,000 tonnes of imports at realisation of Rs 13,530 per tonne.
 
The differences in margins are obvious -- the more CIL can sell at e-auction, the better. Though CIL missed earnings estimates for Q2 with a sequential dip in PAT (profit after tax) versus Q1 (and 106 per cent rise YoY), the share price trend has been strong. Analyst valuations are at around Rs 300.