Coal shortage, high prices may benefit Coal India, Neyveli Lignite

User industries like metals, cement as well as merchant power producers without captive coal mines likely to feel the heat

The economy is bracing for a potential power crisis, caused by a combination of higher demand for power and shortages of coal. Coal inventories at power plants are tight, at 9 days of stock on average, which is higher than the low levels of 4 days reached in October 2021 but less than half of the 17 days normally held at this time (mid-April). Out of 173 thermal plants, around 100 hold less than 25 per cent of normal coal inventory.

While power demand has risen as economic activity expands, and due to air conditioning and irrigation needs in summer, coal supply has been disrupted. Record prices of imported coal make plants reluctant to look abroad. Supply has also been lower due to reduced availability of railway rakes preventing evacuation. As a result, we may see some power outages as well as supply shortages affecting sectors like metals and cement, which are heavy coal consumers. This could negatively impact core sector output.

Import prices of thermal coal and coking coal are likely to stay elevated, given the Russia sanctions (Russia is a major exporter) and high crude and gas prices. Coal India is focussed on ensuring that it improves supply to the power sector, which means other sectors may be sufferers. Despite geopolitical concerns, India may continue to import coking coal from Russia and it has cut taxes on coal imports from Australia to zero, from an earlier 2.5 per cent. The Adani Group has an exposure to Australian coal. India imports 80 per cent of coking coal imports from Australia and around 15 per cent of its thermal imports.

High coal prices should be good for Neyveli Lignite Corp (NLC), and Coal India (CIL) with some caveats. CIL has to supply to many plants at agreed contracted prices before it can sell surplus production at e-auctions (for a likely premium of 100 per cent or more over contracted prices). Hence if production is low, it may not be able to fully capitalise on higher e-auction prices. NLC has its own captive mines.

Power producers with pass-through arrangements, to pass on coal price hikes will not be badly affected. Merchant power producers will be worried about coal supplies, but they may gain from rising power prices. Any power producer dependent on e-auction or imported coal will be under pressure. Right now metals prices are high enough due to supply chain constraints for metal producers to make a profit – however, supply shortages could impact production.

China is a wild card across this entire commodity space. New lockdowns in China could alter the supply–demand balance, which may lead to high price volatility across coal, and the metals space. Chinese demand will fall for sure due to lockdowns but Chinese production will also fall.

Apart from NLC which has gained 23 per cent in the last month, CIL has a price rise of 9 per cent in the same time. There has also been bullish action in the renewables space – this usually runs in tandem with higher fossil fuel prices. Adani Green has been a massive outperformer with 50 per cent return in the last month. NTPC and Tata Power also have double-digit returns in this period.