india’s thermal coal imports live to die another day
TRANSCRIPT
INDIA’S THERMAL COAL IMPORTS LIVE TO DIE ANOTHER DAY
No bailout for seaborne coal
Ashish Sethia & Richard
Hobbs
9 December 2015
1 9 December 2015
TABLE OF CONTENTS
Slide number
Executive Summary 2
Consumption history & forecasts 5
Production history & forecasts 10
Import history & forecasts 15
EXECUTIVE SUMMARY
3
● In FY15 (April 14 – March 15), India imported the largest amount of thermal coal ever – 174Mt, 24% of its demand. Some
think that this trend will continue and India can act as a counterweight to the decreasing imports from China. Two issues will,
however, make this impossible:
● First: fast growth in renewable energy will reduce growth rates of coal power production (and hence coal demand). Our
NEO 2015 analysis predicts that India will produce 75% more electricity from coal-fired generation in 2030 than in 2015 – a 3.6%
compounded annual growth rate (CAGR) compared to 6.8% during FY04-14. Moreover, improvements in thermal efficiency of
India’s coal-fired generation fleet will result in demand increasing only by 49% to 2030.
● Second: the government wants to obliterate thermal coal imports by 2017 by doubling production of Coal India Ltd (which
already has a 80% market share) by FY2020. That may be too good to be true. However, our realistic base case production forecast
reveals that India’s imports are likely to peak this fiscal (if that has not happened already in FY15) and in theory it can cease
thermal coal imports in the year FY23 (although some imports may continue at costal power plants).
9 December 2015
THE FUTURE OF THERMAL COAL IMPORTS IN INDIA
Thermal coal demand and supply projections in base case production scenario (FY06-30), Mt
Source: Ministry of coal, Coal India, Bloomberg New Energy Finance
0
200
400
600
800
1,000
1,200
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
FY
24
FY
25
FY
26
FY
27
FY
28
FY
29
FY
30
Coal India production Other domestic production
Imports
Historic Forecast
Note: our base case production forecast assumes a 7% CAGR in domestic coal production.
4 9 December 2015
INDIA'S PUSH TO INCREASE DOMESTIC PRODUCTION
Historical thermal coal import & projections during FY06-30, Mt ● Government has been pushing an efficiency agenda
focused on increasing domestic coal production,
improving supportive infrastructure (like railways to
transport coal and washeries to improve coal quality) and
raising thermal efficiency of both existing and new coal-
fired power plants. It wants to double Coal India’s
production by 2020 and do away with imports by 2017 –
the ‘High production scenario’ on the chart – which we
think is unrealistic.
● Still, in response, Coal India Ltd has achieved an
impressive rise in thermal coal production in FY2015
(7.3% year-on-year) and 8.9% in H1 of FY2016. We
believe that this higher production rate is the ‘new norm’
for Coal India as they have been able to overcome many
of the inhibitors to production (like infrastructure
constraints and labour unions) that plagued them between
FY10-15 resulting in a CAGR of a mere 2.7% – slightly
higher than the 2.4% we use in our ‘Low production
scenario’ – though we think this scenario is unlikely.
● In our ‘Base case production’ scenario which we consider
most likely, Coal India is expected to retain a 7% yearly
growth rate for domestic production. That implies that
imports will peak this fiscal FY2016 and then
continuously fall to eventually disappear in FY2023.
Source: Ministry of coal, Coal India, Bloomberg New Energy Finance
0
50
100
150
200
250
300
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
FY
24
FY
25
FY
26
FY
27
FY
28
FY
29
FY
30
Low production scenario Base production scenario
High production scenario
CONSUMPTION HISTORY & FORECASTS
6
Source: Bloomberg New Energy Finance,
Central Electricity Authority, Ministry of Coal
9 December 2015
INDIA’S POWER SECTOR MIX & CONSUMPTION HISTORY
Coal60%
Large hydro16%
Gas9%
Wind9%
Other renewables
4%
Nuclear2%
Total 258GW
Grid-connected installed capacity in 2014
● Coal currently dominates India’s power generation capacity. A record 19.4GW of coal capacity was added in FY2015.
● Thermal coal demand has increased at a CAGR of 7.9% during the last decade. But with production only seeing a 4%
CAGR (with legal issues in mine allocations being one reason), imports have jumped a staggering 8 times.
0
100
200
300
400
500
600
700
800
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
Imports
Production
Production, consumption and imports of
thermal coal during FY06-15,(Mt)
7
● India’s power grid remains undersupplied, with 300m people not yet connected to it. Between 2014-30 we expect the
country’s power demand to grow at a CAGR of 5.3%.
● Moreover, the government has promised 24/7 power for all by 2018 and targets to raise solar capacity to 100GW
by 2022 (from 3.3GW in 2014) and wind capacity to 60GW (from 22.5GW).
● In our NEO 2015 analysis, coal shifts from providing 75% of electricity in 2015 to providing 55% of electricity in 2030.
Despite this, the number of TWhs of coal power in India increases by 75% from 2015 to 2030.
9 December 2015
INDIA’S POWER GENERATION OUTLOOK
India power generation by technology during 2012-40, (TWh)
Source: Bloomberg New Energy Finance
0
1,000
2,000
3,000
4,000
5,000
6,000
20122015 2020 2025 2030 2035 2040
Solar thermal
Small-scale PV
Utility-scale PV
Offshore wind
Onshore wind
Biomass/WtE
Geothermal
Hydro
Nuclear
Oil
Gas
Coal
8
● While electricity (TWh) produced from coal will increase 75% during
2015-30, coal demand will only rise 49% due to changes in thermal
efficiency. From FY09 to FY12, India achieved an 11% improvement
in the heat rate of its coal power plants, a rate of ~1% per annum.
● We anticipate heat rates to continue to improve to a point where the
average heat rate of India’s coal-fired generation fleet is equivalent to a
new supercritical power plant built today. This is a result of a
progressive phase-out/upgrade of dirtier generators and a phase in of
new supercritical and ultra supercritical generators.
● Coal imported into India tends to have a slightly higher calorific content
than domestically produced coal (~4,300kcal/kg in FY14 versus 3,500-
4,000kcal/kg). Therefore, as imports have increased in recent years
the average calorific value of all coal burnt in India has improved. This
led to an improvement in efficiency from 779kg/MWh of coal in FY09 to
694kg/MWh in FY12.
● The combination of an improvement in both heat rate and calorific
content of coal has led to a reduction in the number of tonnes of
coal needed per unit of electrical output.
● As India uses more domestic coal, the average calorific value will
reduce but that will not have a major bearing on total coal demand and
imports.
EFFICIENCY IMPROVEMENTS IN INDIAN POWER SECTOR COAL USAGE
India average coal plant heat rate FY09-12, (kcal/kWh)
2,400
2,500
2,600
2,700
2,800
2,900
3,000
FY
99
FY
00
FY
01
FY
02
FY
03
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
9 December 2015
Source: Central Electricity Authority
9
● Our NEO 2015 analysis predicts that India
will produce 75% more electricity from coal-
fired generation in 2030 than in 2015 – a
3.6% CAGR compared to compared to 6.8%
during FY04-14.
● The fast growth in renewable energy will
reduce growth rates of coal power production
(and hence coal demand).
● Moreover, improvements in thermal efficiency
of India’s coal-fired generation fleet will result
in demand increasing only by 49% to 2030.
9 December 2015
THERMAL COAL DEMAND PROJECTIONS
Thermal coal demand projections FY06-30, (Mt)
0
200
400
600
800
1,000
1,200
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
FY
24
FY
25
FY
26
FY
27
FY
28
FY
29
FY
30
Source: Bloomberg New Energy Finance, Ministry of Coal, Coal India
PRODUCTION HISTORY & FORECASTS
11
● In FY15, 87% of coal consumed in India was thermal coal. Coal India produces 80% of the country’s domestic thermal coal.
Growth was a meagre 2.7%/year between FY10-15 due to issues with permitting of mines, land acquisition, environmental approvals, lack
of railways for transportation and issues with labour unions. In FY15 the firm produced 494Mt – 7.3% growth year-on-year (YoY) –
closer to the 5-7%/year seen during FY07-10. H1 of FY16 has been even better with 8.9% YoY growth on H1 FY2015. We believe that
these higher growth rates are the ‘new norm’ as some of the production issues which have plagued their output historically are being
overcome.
● The Indian government has given Coal India a target of 1bn tonne of total coal production (thermal + metallurgical) in 2020. In the
last decade, thermal coal has been 90% of the company’s total output so the 2020 target will translate to ~900Mt of thermal coal target.
The firm estimates that it can reach 908.1Mt of total production from projects that have already been identified. Other firms have been
given a 500Mt target and thermal coal is 90% of their output as well, which means that in total, the government is aiming at 1.35bn
tonne of thermal coal production by 2020.
9 December 2015
COAL PRODUCTION HISTORY AND TARGETS
India’s domestic thermal coal production targets FY06-20, (Mt)
Source: Bloomberg New Energy Finance, Ministry of Coal, Coal India
0
200
400
600
800
1,000
1,200
1,400
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
Coal India production Other domestic production Total consumption Total production target Coal India production target
12 9 December 2015
COAL INDIA’S 2020 TARGET AND THE ‘NEW NORM’ FOR ITS PRODUCTION
● In response to the 1bn tonne target in 2020, Coal India estimates that it can produce 726Mt of coal
(~654Mt of thermal coal) in FY20 from existing and under implementation projects. It has identified
another 182Mt (~164 Mt of thermal coal) from projects in the pipeline which are yet to enter
implementation. The company plans to meet a further 91Mt (~82Mt of thermal coal) in FY20 from projects
which are yet to be identified.
● We believe Coal India will miss the target. However, we do believe that the firm has overcome the low
growth period seen during FY11-14 and is now experiencing a structural shift towards achieving a higher
long-term production growth of 7% per annum – which will take it to 690Mt in FY20.
● Its return to robust growth has been assisted by the government’s drive for efficiency coupled
with rapid production expansion. Labour unions have reduced noise over a labour utilisation efficiency
drive (a move to reduce man hours per tonne of coal produced) as increases in production and higher
growth targets have been able to quell fears of job losses. According to the firm, it is “employing various
methods (to increase production) such as large-scale contract mining through Mine Developer Operators,
speeding up land acquisition, improving infrastructure at coalfields and modernising mines”. Measures
include switching to full mechanisation, adopting new technology and expediting the environmental and
regulatory approvals process. It is also aiming to modernise procurement of equipment, work and
services through an e-tender platform, build washeries to improve coal quality at various sites and
implement GPS monitoring to improve operational efficiency of road transport.
● Coal transport represents a remarkable 25% of India’s total rail freight but lack of new transport capacity
remains a major bottleneck for the company. The Ministry of Railways plans to finish three critical
new rail lines linked directly to Coal India operations by 2016, although experts suggest that 2017
may be more realistic. It is estimated that the new rail corridors (Tori-Shivpuri-Kathotia in Jharkhand,
Bhupdeopur-Korichhaapar in Chattisgarh and Barpali-Jharsuguda in Odisha) will allow for delivery of
300Mt of additional coal annually. If the 300Mt figure is correct, then this upgrade alone would provide
more than half of the growth Coal India requires to meet its 2020 target
0
200
400
600
800
1,000
1,200
1bn tonnes
Existing projects, 17%
Projects under implementation, 56%
Identified projects,18%
Unidentified projects,9%
Source: Ministry of Coal, Coal India, Bloomberg New Energy Finance
13
● Non-Coal India firms produce roughly 19% of India’s thermal coal output. In FY15, other producers’ (non Coal India
producers) thermal coal production increased by 11.1%, and their metallurgical coal production increased by 33.1%.
● This follows a period from FY10 to FY14 when thermal coal production actually decreased, after 10%+ growth rates
during FY07 to FY09. We believe that like Coal India, other producers’ production has reached a ‘new norm’ of long term
growth at ~7% per annum.
● Other producers have benefited from many of the same removal of barriers to production that have aided Coal
India such as improved rail transport efficiency and expedited approvals processes.
● The government has set an unrealistic target of 500Mt of production for other producers by 2020, which would
require a 34% CAGR to FY20. Still, their output is expected to rise significantly.
9 December 2015
OTHER PRODUCERS
Indian thermal coal production in FY14 by type of
firm Other producers’ production (Mt)
Production (Mt) YoY growth rate
Source: Ministry of Coal, Coal India, Bloomberg New Energy Finance
Coal India81%
Other public firms13%
Private firms6%
Total = 509 Mt
-10%
-5%
0%
5%
10%
15%
20%
0
20
40
60
80
100
120
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
14
● In our ‘Base production scenario’, India’s own thermal coal production increases at 7% per annum – lower than FY15 and H1 FY16, but
higher than a longer term historical trend. This reflects the ‘new norm’ of production seen from Coal India since the beginning of FY15.
● In our ‘High production scenario’, India’s domestic production is assumed to meet government’s new production targets – something we
think is unlikely to happen. In the eventuality that the targets are met in FY20, we believe that production will taper down after that as
supply will exceed demand and the overcapacity will lead to an optimisation of the highest cost production.
● In our ‘Low production scenario’ India’s domestic production continues at the 5 year historical CAGR of 2.4% between FY10-15. This
scenario is excessively pessimistic as it ignores the recent increases increases that Coal India has experienced over FY15 and H1 FY16.
9 December 2015
COAL PRODUCTION PROJECTIONS
Thermal coal supply projections FY 06-30, (Mt)
Source: Bloomberg New Energy Finance, Ministry of Coal, Coal India
0
200
400
600
800
1,000
1,200
1,400
1,600
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
FY
24
FY
25
FY
26
FY
27
FY
28
FY
29
FY
30
IMPORT HISTORY & FORECASTS
16
● Thermal coal imports touched an all time high of 174Mt in FY15. The Indian government aims to cease imports within
two years, although this looks highly unlikely given the recent growth in imports.
● From FY10 to FY14, India’s domestic thermal coal production increased at a CAGR of just 2.4%. During this period
imports grew at a CAGR of 29%. However, an 8% rise in domestic production in FY15, an even higher increase in H1
2015-16 production and improved thermal efficiency of power plants have started to take a bite into import demand.
● In H1 FY16 imports of thermal coal by utilities actually reduced 6% on H1 FY15 levels, suggesting that Indian imports
may have already peaked.
9 December 2015
THE RISE OF COAL IMPORTS
Imports of thermal coal FY06-15 (Mt) YoY growth rate
0%
6%
12%
18%
24%
30%
36%
42%
48%
54%
60%
0
20
40
60
80
100
120
140
160
180
200
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: Bloomberg New Energy Finance, Ministry of Coal, Coal India
17
● Indonesia is the biggest exporter of thermal coal to India, exporting 78% by volume and 72% by value in 2013-14. We expect
this to continue until imports cease in 2022. It is also going to be the country which will suffer most from India’s increased
domestic production and lower demand. Some of Indonesia’s coal is lower quality than those from Australia and South Africa and
there is little demand for it in the global seaborne market. This coal therefore sells at low prices, comparable to prices of domestic
Indian coal, which is favourable for Indian importers. Even if our ‘Low domestic production’ scenario happens, Indonesian imports
may suffer as there is a possibility of India importing higher quality coal after 2020 due to health and environmental concerns.
● South Africa and Australia export higher quality coal to India than Indonesia. In FY13-14, The cost of Australian coal exports per
tonne was 73% higher than that of Indonesia. Due to this, Australian exports represent 4% by export volume, but 6% by export
value. The value of Australia’s thermal coal exports to India in 2013-14 was $500mn, representing just 0.2% of the country’s total
exports in that year.
9 December 2015
IMPORTS BY COUNTRY
Thermal coal imports by value and country of origin in
FY13-14, (USD)
Thermal coal imports by volume and country of origin in
FY13-14, (Mt)
Indonesia72%
South Africa18%
Australia6%
Others4%
Total = USD
8.96bn
Indonesia78%
South Africa15%
Australia4%
Others3%
Total = 131.2Mt
Source: Bloomberg New Energy Finance, Ministry of Coal
18
● In our ‘Base production scenario’, thermal coal imports cease in FY23. This is even after Coal India’s thermal coal
production comes in 23% below their target in FY20 and India’s total production is 43% below its target.
● In the ‘High production scenario’, thermal coal imports cease in FY17, in line with the government’s expectations,
after peaking in FY15.
● In our ‘Low production scenario’ thermal coal imports continue to rise each year and reach 262Mt in FY30, 50%
above FY15 levels. India’s total domestic production reaches only 620Mt, 55% below the national target in FY20.
Importantly, even in this excessively pessimistic production scenario thermal coal imports only increase at a CAGR of
0.9% from FY20 to FY30.
9 December 2015
IMPORT PROJECTIONS
Thermal coal import projections (Mt), 2005-06 to 2029-30
0
50
100
150
200
250
300F
Y0
6
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17
FY
18
FY
19
FY
20
FY
21
FY
22
FY
23
FY
24
FY
25
FY
26
FY
27
FY
28
FY
29
FY
30
Low production scenario Base production scenario High production scenario
Source: Bloomberg New Energy Finance, Ministry of Coal
19
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9 December 2015
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