Can India fill ‘China-shaped hole’ in global markets?

By Saqib Rahim | 09/09/2015 07:36 AM EDT

With China’s economy cooling off, the coal business is losing the friend it trusted most to keep demand, and prices, high. That’s why the industry’s already pointing to its next great hope: India.

With China’s economy cooling off, the coal business is losing the friend it trusted most to keep demand, and prices, high.

That’s why the industry’s already pointing to its next great hope: India.

Coal companies argue that India will lead the next chapter of global coal growth, helping lead an industry recovery. But they’re up against analysis that says India won’t be a second China and that India may feed its needs domestically rather than import from Indonesia, Australia or the United States.


"I doubt that India will be plugging the China shaped hole in the coal market," Tom Pugh, a commodities economist with Capital Economics, said by email. "But if it could then that would certainly represent a light at the end of the tunnel for coal producers."

That light can’t come soon enough for U.S. miners. International coal price benchmarks, which have in recent years topped $120 and $200 per metric ton, now languish beneath $60. That decline has hammered earnings, knocking some U.S. coal giants into bankruptcy and leaving others to contemplate it (EnergyWire, Aug. 4).

India coal
The coal industry’s great hope now turns to India, which gets 70 percent of its power from coal plants like this Japanese-financed unit.

The cause: a huge global oversupply of coal that was prepared for unremitting Chinese growth. The coal industry argues that prices will recover in the next two years, as global production tapers and economies revive.

The International Energy Agency’s current base forecast, routinely cited in the coal world, sees global demand for the fuel growing 15 percent by 2040. In that story, India replaces China as the world’s largest importer within a decade.

But that’s the long view. In the present, U.S. companies are hemorrhaging cash and facing pressure to right-size their businesses for the future.

That means deciding if the current crash is cyclical — bound to rebound — or a sign that coal demand will never again grow as it has.

U.S. coal giant Peabody Energy Corp., the world’s largest private-sector coal firm, is already keeping the India watch.

"Seaborne thermal coal demand was hampered in the first half of 2015 by lack of growth in coal-fueled generation and policy measures in China," Peabody said in an August filing. "These factors have more than offset growth seen in Indian imports."

Chinese coal demand tapered by 51 million metric tons in the first six months of 2015, Peabody said. Indian imports, meanwhile, rose by 23 million metric tons.

‘There is no other China out there’

Some analysts have been warning of the trend. "Once Chinese coal demand starts to fall, there is no robust growth market for seaborne thermal coal anywhere," Bernstein Research said in a June 2013 report.

"India will fail to pick up the slack in the seaborne market from the loss of China’s volume and, as a marginal buyer, will support a far lower price than China has in recent years," analysts Michael Parker and Purdy Ho said.

"From a demand angle, thermal coal’s eggs lie firmly in the India basket," Macquarie Research analysts wrote this May.

Even with brisk growth in Indian coal demand, the IEA said, India will not match the kind of demand increases China has shown this century.

"There is no other China out there," it said in a December 2014 report.

But U.S. coal companies say there doesn’t have to be. They’re betting India, China and the rest of the developing markets can reinvigorate them in the long term.

As Peabody said in its August filing, compared with the current market, "our long-term outlook for international coal market segments is more positive based on anticipated growth in Asia."

Alpha Natural Resources Inc. claimed, in a May presentation to investors, that China and India are still huge growth markets. They’ll drive 90 percent of global demand for thermal coal through 2020, Alpha said. The company filed for bankruptcy last month.

Pressure on India

There is one more wild card in that view: Can India pull its coal sector together?

The country holds some of the world’s largest coal reserves — fourth largest, according to the IEA — but has not been able to exploit them to the fullest.

The industry is low-tech compared with its international peers. It’s dogged by labor disputes and theft. Despite having the largest rail system in the world, India has such unreliable coal transport that generators have to run at partial power.

All of these factors add up to a low-productivity sector. Coal India Ltd., the country’s largest producer by far, gets about 1,000 metric tons of coal from each employee in a year. Peabody gets over 36,000, according to Australia’s Department of Industry and Science.

Whatever India can’t produce, it will have to import. That’s why experts are watching whether the coal sector can hit its government-set target of 1.5 billion metric tons of production by 2020.

Coal India, which commands 80 percent of the nation’s output, has plenty of skeptics. But Prime Minister Narendra Modi has made it a priority for reform.

"Coal India increased its production by 31 million tons last year. It was the biggest incremental rise in 40 years," said Sylvie Cornot-Gandolphe, a research associate with the Oxford Institute for Energy Studies.

She said India expects to meet most of its growth in coal demand from its own mines.

"The production target for 2020 remains challenging and may not be reached in the given timeframe," she said by email. "But the trend is there: Indian steam coal imports are going to decrease."