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India is growing, but taking a breather - A macro economic view

ANALYSISBy Dr. Lars Schernikau President of HMS Bergbau Group, Singapore and Germany

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I ndia has probably been the most impressive growth story in global development and as a result for the global seaborne coal market of the

past five years. 1,3 billion Indians, running the largest global democracy, have turned the country into the 10th largest economy in the world after the US, China, Japan, Germany, France, the United Kingdom, Brazil, Italy and Russia. According to official studies, if India achieves an average annual GDP growth rate of 7,4 per cent, it would be the third largest economy in the world, after China and the US, by 2047. Current Prime Minister Narendra Modi has made it a priority to revive the economy, eradicate poverty and provide all Indians access to electricity by 2022. It is expected that in 2014, about 25% or over 300 million Indians have no access to electricity! This number is far higher than in any other larger developing nation, only Nigeria is worse off with about 50% without electricity. In addition, India will

add 400 million people over the next 30 years making the total that require electricity a staggering 700 million.

Despite this, today, India is the world’s fourth largest primary energy consumer after China, US and Russia and the third largest coal power generator after China and the US (refer Table IV-4 on page 87). The country’s per capita GDP PPP is at Int$ 5.800 (IMF 2014) and primary energy consumption is only one-third of the global average while its electric power consumption per capita is 684 kWh per day, compared with China (about 3.300 kWh) and the United States (about 13.000 kWh). One thing is for sure, India has watched China carefully, how the neighbor brought 600+ mln people out of poverty and increased per capita electricity use rate from 420 kWh in 1990 to the number today almost 8x higher. Thus, we know where India will be in 10 years, there is much to do, India will do it… and this requires a huge amount of electricity and as a result coal.

It is therefore not surprising to see that if India pursues its economic growth targets, it is expected to have the highest growth in energy demand until 2035. As a result, it is also not surprising to see that India has become the single largest importer of coal and that India’s coal consumption is forecasted to increase for many years and decades to come. India’s coal generation share has been around 70-80% for many years (Figure I. While IEA-Electricity 2014 predict 71% coal share, other local research companies such as CEA and Lok Sabha even calculate 80% coal share (Figure II). Coal is also expected to continue contributing 80% of all new electricity generation coming online (CRU 2015). In 2015, India has about 160 GW installed coal fired capacity. This is expected to increase by another 100GW (or 62%) by 2025. The coal fired power expansion is planned in addition to reaching a 25% renewable share by 2020 (Indian Newspaper reports, March 2015).

Coal production by state Electricity share

Coal 7,1% Hydro 16% Gas 8% Nuclear 3% Oil 2%NA 0-10 Mmt 10-50 Mmt50-100 Mmt 100+ Mmt

Kolkata

Delhi

Mumbai Odisha

Chhattisgarh Jharkhand

Figure I: India’s coal production by state and electricity mix

Note: Data based on 2012 numbersSource: Author’s Analysis based on Provisional Coal Statistics 2013-2014, Government of India, Ministry of Coal, IEA-Electricity 2014

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[ ANALYSIS ]

India is an immensely complex country. I have been able to travel to India 4-6 times per year for almost 10 years and I have learnt how diverse the regions are and how difficult it is to manage infrastructure, the business community, the people and politics at large. I am personally very optimistic about India’s future development but also realistic about what may be achievable. Some of the more aggressive projection of productivity improvements will not materialize as forecasted; this includes projections and goals of Coal India Ltd, the single largest producer of coal in the world. India remains a country with many opportunities to improve. Its power plant park is surely not optimized, plant capacities are not used efficiently and existing infrastructure not used to the fullest. India is also struggling with incorrect use of government money by its politicians and states men (see December 2014 crisis on inflated coal prices to government power plants). Nevertheless, it is impressive what has happened here in the past 10 years and the world of coal continues to watch India closely.

History on coal import volumes and originsIndia is the 3rd largest coal producer

in the world accounting for 12% or 565

Mt of global output. India imported less than 20 Mt. By 2009 India imported 50 Mt of steam coal. In 2014 India imported already 178 Mt of steam coal as per VDKI 2014, becoming the single largest importer of steam coal in the world, surpassing long-time leader Japan. The numbers differ depending on the research institute used (Perret Associates account for 152 Mt of Indian coal import in 2014), but after the Chinese import reductions in 2015, India has become the single largest importer without any doubt. MacQuarie 2015 forecasts that India’s share of global seaborne trade will increase from approx. 16% in 2014 to 22% in 2019. Import

volumes – they predict – will grow to 220-240 Mt by 2019. While this may be somewhat optimistic given the recent domestic production ramp up, it still shows the demand potential.

India purchases coal primarily from Indonesia and South Africa. Indonesia coal is sought after for its generally low ash and low Sulphur content and South African coal is thought after for its higher calorific content. The import growth of over 20% p.a. over the past 5 years (Figure III) will not continue. But it is interesting to see that Indonesia’s share has continuously increased while South Africa was not able to keep up. Australian coal imports were quite a new phenomenon driven by low freight rates. At times, some US coal and previously Chinese and Vietnamese coal also found its way to India.

Domestic market supply and demandSupply: India has vast local coal resources

and an extensive coal production industry. The coal tends to be of lower quality, higher ash and logistically in difficult locations. The coal is produced in various states centered in the north east (Figure V-2 on page 138). Coal India is the world’s single largest coal producer employing about 330.000 people and it also accounts for over 80% of India’s coal production.

Figure II: India’s coal-�red electricity generation (2011 to 2015)

Note: Annual average increased from 66% in 2011 to 76% in 2015Source: Author’s Analysis based on CEA, Perret (Nov 2015)

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Note: Data estimated for steam coal and sub-bituminous coalSource: Author’s Analysis based on Perret Associates

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Figure III: India’s Steam Coal Imports, Growth and Origins

2009

39 (65%)

21 (34%)

1 (1%)

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Other Asia/USAustralia +60%

CAGR2009-2014

South Africa +6%

Indonesia +24%

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CAGR +21%

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It is estimated that Coal India’s coal output reached 600 Mt in 2015 and is expected to grow at an annual average growth rate CAGR of 4.8% until 2019, below the demand growth resulting in continuously growing imports, albeit slower (see CRU 2015 as we well as Figure V-5). At the time of my first book in 2006, Coal India produced only about 340 Mt. The government is planning to reach close to 1 Bt by 2020, which I personally doubt. However, Modi was able to achieve production increases at Coal India to a level that even surprised senior Indian officials. In September 2015, for the first time since its inception on 1975, Coal India Ltd (CIL) was looking for buyers. “We were not ready for this,” said a CIL official (The Hindu Press), as the threat of major stockpiling at pitheads loomed. In addition, Modi has an aggressive plan to privatize a significant chunk of India’s coal production When CIL and private producers are able to increase production faster than consumption will grow (which is expected to be at 7-8% p.a.) then imports will stop growing or possibly decline. I personally believe a decline is a decade away, but we will see how India performs, we have already seen some short term adjustments in late 2015.

The government has plans to privatize a portion of CIL. The private sector’s role in India so far has been limited to captive use. In 2014, the Indian government deemed all coal blocks allocated since 1993 illegal. New coal block auctions have been underway since then. Under the new auction rules, the highest bidder has to pay 10 per cent of net present value upfront to government. This is limiting the participants to a handful and thus leaving the coal blocks in a concentrated few hands.

Demand: NTPC is the largest government owned utility that generated about 25% of India’s electricity in 2014/15. Many private utilities owned by conglomerates such as Tata, Jindal Reliance and Essar as well as medium sized power producers all around India make up for the rest. India’s cement industry also is a significant coal import driver. Cement is driven by companies such as (in alphabetical order) ACC, Amubdja, Dalmia, Heidelberg Cement, India Cements, JL Lakshmi, JK Cement, Ramco Cement, Shree Cement, and Ultratech (Aditya Birla group). Analysts are positive about the Indian cement industry’s demand projections; capacity is slowing and cement demand increasing, so in addition to power, here is another customer for coal that

likes buying South African coal and also petcoke.

It is clear that domestic infrastructure was not ready and coordination within India remains a challenge. Rolling stock, train tracks, connection to power plants and port areas are continuously improving but are still not sufficient. Overpopulation and the resulting unavailability of land is another deterrent to fast and large infrastructure developments. In addition, power needs to be paid for. There seems to be a liquidity crisis in India where power distributors are not able to pay power producers on time, which trickles through to coal importers. When you go all the way to the private power consumer in India, it appears that many are simply not used to (1) having power and (2) if they get the power, to pay for it. This will of course change over the years, but now it seems that at times electricity ‘disappears’.

Prognosis for the futureThe numbers from CoalSwarm/

SierraClub 2015 will give the reader a good understanding of how India is expanding: Since 2010, 79 GW of new coal-fired capacity has been completed, raising the country’s coal-fired generating capacity to 165 GW. An additional 70 GW is already under construction (Figure V). By 2020, India may have built about 2.5 times as much coal fired capacity as the U.S. is about to lose. However, please keep in mind that average Indian power plant plant load factors have been declining from 78% in 2009/2010 to 65% in 2014/2015 (as reported by NTPC). This is a sign that new plant build will slow. Hydro power will continue to generate its share but it is too unreliable for India. The flow of water in a hydropower project is uneven during the year – high during monsoons and gradually tapering off – so for the same capacity, a hydropower plant generates 33% less electricity than a coal-fired power

Note: India �scal year is April to March. For example, FY2005 represents April 1, 2004, to March 31, 2005. Data for 2015 are preliminarySource: Author’s Analysis based Energy Statistics 2015, Government of India, Ministry of Statistics and Program Implementation; Provisional Coal Statistics 2013-2014, Government of India, Ministry of Coal; news reports

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Figure IV: India‘s domestic coal consumption & production (2005-2020)1.600

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Coal India limitedproduction targets

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Source: CoalSwarm/SierraClub 2015

Figure V: Indian coal �red power plant projects

Status coal plants

Announced

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plant. Hydro power imports from Bhutan or Nepal also have a good potential, but the mentioned unreliability will remain. Gas fired power is simply too expensive in India. The gas needs to be imported and the cost per MWh is expected to be about twice the cost of coal fired power. Nuclear power is too expensive and the government and people are concerned for its risk. Nuclear will unlikely expand from its current share of about 3%. So the only two that can expand are renewable and coal. Renewable will definitely move up and develop but will not be nearly enough to meet India’s energy hunger; it simply will not work without coal.

The question for the entire market is, when this “India coal import peak” will be reached. Based on the information available and interviews had I would suggest that this will happen post 2020 after which imports may pull back and hover between 100 and 150 Mt annually. Nevertheless, local production by CIL and private producers will have to work hard to get even close to match India’s electricity growth. CRU 2015 differentiates between bull, base and bear cases for India. In all of them will India continue to increase their import, the question is only by how much. In terms of supply, Indonesia will always supply the quantity that India wants or needs, thus, the country

is not too concerned. Even if Indonesia’s exports stay stable or drop, India is logistically too well located. Still, Indian companies are concerned about supply security and have invested in coal mine projects in Australia, Indonesia, Africa (Figure VI). These investments have had a limited success, especially in Indonesia many Indian utilities (not necessarily mentioned below) invested and lost a lot of money.

India is growing, but taking a breather. Don’t expect for India to save the world coal trade. Growth will be minimal for some time. While I expect imports to continue on a growth path for some time, I may be proven wrong. Risks remain and

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Source: CoalSwarm/SierraClub 2015

Figure VI: Indian overseas coal investments

AUSTRALIAGalilee and Abbot Point: In August 2010 Adani Group bought the Galilee coal tenement in Australia, with plans of mining up to 60 million tonnes of coal per year. In May 2011 the Adani Group paid US$1.829 billion for the Abbot Point Coal Terminal in North Queensland, and in 2014 Adani won approval for the Carmichael Coal Project and a rail link to transport the coal to Abbot Point for export. The approval is facing three legal challenges, including improper consideration of the project’s full climate impacts. In November 2014 Adani signed a memorandum of understanding with the State Bank of India for a loan of up to US$1 billion to �nance the project. In January 2015, Adani awarded a US$2 billion contract to an Australian engineering �rm for development of the Galilee Basin mines, with production set for 2017. However, major banks including Deutsche Bank, Royal Bank of Scotland, HSBC, Barclays, Citigroup, Goldman Sachs, and JPMorgan Chase have stated they will not �nance the project, and reports increasingly question its �nancial viability (Milman, 2014). Additionally, in Janurary 215 Queensland elected a new Labor government on a platform of halting any taxpayer funds going towards the project.

Western Australia: In March 2011 Lanco Infratech bought Gri�n Coal’s Western Australia coal mines, with plans to increase the mines’ production four-fold to over 15 million tonnes per annum, in addition to adding rail

linkages and expanding the Bunbury port. However, by 2014 Lanco had entered �nancial di�culties and was seeking outside investors to purchase a stake in its Australian mining and port ventures, raising questions over their long-term viability.

Queensland: In mid-June 2011 GVK Power and Infrastructure purchased two of Hancock Coal’s thermal coal mines in Queensland for US$2.4 billion. The two mines have a capacity of 30 million tonnes per annum each, and have shared mine infrastructure, rail, and port facilities. The �nancial viability of the projects has been questioned due to declining coal prices, and in December 2014 Societe Generale, one of GVK’s lenders, withdrew its support.

MOZAMBIQUETete Province: In August 2009, Coal India Africana Limitada, a subsidiary of Coal India, obtained a 5-year license for exploration and development of two coal blocks in Tete Province. The deposits were later found to be of low-quality. Beira port: Essar Energy has said it plans for coal from its captive coal mines in Indonesia and Mozambique to be used for the Salaya power plant in Gujarat, India. In April 2014, Essar announced plans for a new US$25 million coal terminal at Beira port in northern Mozambique. Benga coal mine: Mumbai-based Tata Steel was a 35 percent joint venture partner with Rio Tinto Coal

Mozambiquein the development of the Benga coal mine, initially expected to produce 4.5 million tonnes of coal annually for export via the Sena railway to Beira port. In July 2014 Rio Tinto sold 65 percent of its share in the Benga mine for US$50 million to India’s International Coal Ventures Limited, which plans to expand mine production. In November 2014, the �rst shipment of coking coal from the Benga mine reached Vizag port in India, destined for the Steel Authority of India Limited.

INDONESIATata and Bumi Resources: In March 2007 Tata Power purchased a 30 percent stake in two coal mines owned by Bumi Resources for approximately US$1.3 billion. The mines were to supply 10 million tonnes of coal per annum to India. In 2014 Tata Power sold its entire 30 percent stake in one of the mines for US$500 million, and 5 percent of its stake in the other mine for US$250 million due to losses at its Tata Mundra Power Station which the mines were supposed to supply.

Tata and BSSR: In November 2012 Tata Power bought a 26 percent stake in PT Baramulti Suksessarana in Indonesia, which co-owns approximately 1 billion tonnes of coal resources in South and East Kalimantan. As part of the deal, Tata plans to purchase 10 million tonnes of coal per annum for supply to India.

coal producers cannot rely on India as their savior, they need to continue cutting output and cost.

About the Author:As a co-founder, shareholder and

former member of the supervisory board in the German-based, publicly listed, international coal trading, logistics and mining companies HMS Bergbau AG and IchorCoal NV Lars has founded, worked for, and advised a number of companies in the coal and energy sector in Europe, Asia and Southern Africa. Today he oversees the development of HMS Bergbau’s coal marketing and operations in Asia, Africa and Europe.

Lars finished his PhD on the economics of the global coal business and published “The Renaissance of Steam Coal” in 2010. This article will be reprinted in his coming book.

List of Selected Sources:

CoalSwarm and SierraClub (2015); Boom and Bust – Tracking the Global Coal Plant Pipeline; Christine Shearer, Nicole Ghio, Lauri Myllyvirta, and Ted Nace; March 2015; by CoalSwarm and Sierra ClubCoalSwarm/SierraClub 2015CoalSwarm/SierraClub 2015Coal Atlas 2015

CRU 2015; The Tiger in the Room – Special report in WorldCoal Magazine by Alex Tonks from CRU Research Institute; Published on WorldCoal’s website on 16 June 2015CRU 2015

Glencore – Barcelona (2015); Glencore Presentation at 2015 Global Metals, Mining & Steel Conference; Barcelona, 12 May 2015Glencore-Barcelona 2015

IMF (2014), International Monetary Fund GDP Data, based on estimates of projected data based on World Economic Outlook Database, October 2015, Database updated on 6 October 2015; http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD; Accessed on 6 October 2015IMF 2014

IEA-Electricity (2014), IEA Statistics - Electricity Information, 2014 Edition, International Energy Agency ParisIEA-Electricity 2014IEA-Electricity 2014IEA - CO2 2014

MacQuarie (2015); Coal in a Hole – Just How Deep is it?; MacQuarie Commodities Research Report; MacQuarie Capital Europe; London, September 2015MacQuarie 2015 Oerter-VDZ 2014

Perret Associates 2015; various research – Perret Associates Ltd. is a partner and sponsor of this book and has agreed to provide research support, LondonPerret Associates 2015Perret Associates

VDKI; Annual Reports for the years 2006, 2007, 2011/12, 2013/14 and 2014/15; Annual Report of the German Coal Importers Association (Verein der Kohlenimporteure e.V.), Hamburg, published each spring/summerVDKI