Indian state utilities keep their nerve as stocks begin to steady

This story was written by Rakesh Dubey.

In a major surprise to many market players, the dramatic slide in coal stocks at Indian power plants between April and October has not seen a swathe of panic buying by the state-owned generators. Instead the situation has been carefully managed by government officials and the Indian railways to the extent, that despite stocks hitting near record lows of five days of coal burn, there were no black outs and now there is confidence that stocks will now grow as Coal India Ltd (CIL) production ramps up. This is in sharp contrast to previous critical falls in power plant stocks, such as in 2014 (a record thermal coal import year for India) when stock hit five days of burn. Then generators rushed to the import market to secure tonnes. This time only four state-owned generators, including NTPCL, have come out and for limited prompt imports.

In order to keep the state-owned generators operating, supplies were diverted from industrial buyers and merchant power plants by reducing their fuel supply agreement volumes and the availability of regular e-auction tonnes. Consequently these end-users had to scramble for tonnes but are buying only on a very prompt basis, hoping that CIL can ramp up supply quickly. Consequently import levels rose 15-20% in September on August levels and October import levels are expected to hit record levels due to industrial and private generators seeking replacement tonnes for domestic material. It is predicted that November imports will also be very strong, while the jury out for December levels, waiting to see if CIL can keep its promises. Coal stocks at Indian power plants monitored by the Central Electricity Authority (CEA), slipped over a period of seven months to a low of five days burn at the beginning of October from a high of 19 days burn at the beginning of April. In terms of tonnage, stocks fell to a low of 7.26 mt as on 19 October, down 74% from a high of 27.74 mt as on 31 March.

With the exception of APGENCO, the Andhra Pradesh generator which is tendering for 2mt, the limited number of inquiries from state-owned generators were also conservative in their import volumes.

However, other state-owned plants like Tangedco (the Tamil Nadi state-owned generator) and West Bengal Power Development Company floated small inquiries ranging between 0.5 mt and 0.2 mt, to offset an immediate shortage in domestic coal supplies.

NTPC, the largest Indian state-owned generator, which was weighing up a return to the import market in August, only purchased around 0.1 mt. Other state owned-generators, which claimed to be on the verge of re-entering the import market, such as Mahagenco, the Maharashtra state generator, and Karnataka Power have decided to stick with domestic supplies.

It is understood that the decision by Mahagenco was made after the personal assurance of Coal Secretary Susheel Kumar that supplies from Western Coalfields would get better. The meeting was held after Mahagenco sought approval in September from the Ministry of Power and the Ministry of Coal to buy imports.

Stocks rebounding - what worked?

After hitting recent record lows this month, stocks at the power station monitored by the CEA rose to 7.59 mt on 22 October which is enough for six days burn. This prompted power ministry officials to comment that from here onwards, stocks will continue to improve and by the middle of November everything will be normal. "It does not matter (whether the stock had reached to 7.26 mt on 19 October), because from here onwards, it (stocks) will only rise because of increased supplies from CIL," a senior CEA official told IHS Markit.

And despite the low stocks government agencies were able to manage the shortage of supply so that there were no outages, the official said.

It is understood the government started working on a war footing in August. Instead of meeting once in a week to monitor coal supply to power plants, a committee comprising members from the Ministry of Coal, Ministry of Power and Indian Railways, started meeting twice a week to ensure that power plants, at least the state owned ones, get sufficient coal, an official of Coal India (CIL) said. "We are managing the crisis on day to day basis. Wherever there is a crisis we are ensuring supply of coal to those areas on priority basis by diverting railway rakes as and when needed," a member of the committee said. Though it meant, the supplies to industrial customers were curtailed, the official added.

Not out of the woods yet

There are still supply risks for the generators over the next three to four days because of Chhath Puja, an important religious festival in eastern Indian states bordering Bihar, on 27 October, a Ministry of Coal official said.

"Chhath Puja may impact production to a degree in mines of Central Coalfields Ltd (CCL), Northern Coalfields Ltd (NCL) and South Eastern Coalfields Ltd (SECL), but things should be normal thereafter," the official said.

This was backed up by a CEA official who reported that mine production will start rising after Chhath Puja and once the production streamlines, it will take three days to take the coal from mine loading points to consumption points. "So from 1 November, the stock of coal at power plants will again start rising," the CEA official said.

An official of Indian Railways also spoke on similar lines. "On 23 October, we loaded 220 rakes (one rake has 58-60 wagons and carries about 4,000 tonnes of coal) for power plants. It may so happen that because of Chhath Puja, the number of rake loading may fall to 200 rakes/day or even 190 rakes/day in between 27 October and 30 October, but we will continue to priorities deliveries so that power plants do not suffer," the official of Indian Railways said. The target number of rakes that should be loaded with coal is 240/day.

Import prospects

The CEA is unlikely to set an import target for government owned domestic coal based power plants in the immediate future or at least until March-April 2018 when it will meet to set targets for the 2018-19 financial year.

"What is the benefit in asking government plants to go for imports at this moment when we know that in next few months domestic coal supplies will improve? That is why we are not recommending government plants to go for imports," the CEA official said. However, he indicated that they may consider setting import targets for such plants in the 2018-19 financial year. "If CIL says that they can supply only a particular quantity in 2018-19 and if the demand from power sector is estimated to be higher, then we will take a call. If we feel that we have to go for imports, then we will do, otherwise will not go for imports," the official said.

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Rakesh Dubey is a Research and Analysis Associate Director at IHS Markit. This article originally was published as part of the McCloskey Coal Report Publication.
Posted 1 November 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.