Price of imported coal is poised to rise by 45-55 per cent in first quarter of FY23, says ICRA

The price of imported coal is poised to rise by 45-55 per cent in the first quarter of FY23 as markets face supply disruption following the Russia-Ukraine conflict and it would severely impact domestic users of imported dry fuel, ICRA said on Monday.

Russia remains a key supplier of coal in the seaborne market, accounting for 17 and 10 per cent of the international trade in thermal coal and coking coal respectively, as per ICRA's latest report on coal sector.

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"Prices of imported coal are poised to spike by 45-55 per cent Q-o-Q in Q1 FY2023 as markets face supply disruption following the Russia-Ukraine conflict. As per latest ICRA note on the coal sector, this will severely impact domestic users of imported coal since, notwithstanding some moderation from the all-time highs of March 2022, coal prices are expected to stay elevated throughout FY2023," it said.

With SWIFT sanctions imposed on some Russian banks and concerns over counterparty credit risks, buyers are unable to trade with Russian coal suppliers. Moreover, a growing number of western power utilities are also looking to voluntarily place an embargo on Russian coal supplies, which is leading to disruptions in the normal coal trade flows.

"Notwithstanding elevated prices, supplies from non-Russian sources are unlikely to fully compensate for the shortages in Russian supplies as miners have limited spare capacity to ramp up production. As coal supplies remained tight, domestic spot e-auction premiums for auctions conducted by Coal India Limited reached all-time highs, climbing sharply to 270 per cent in February 2022 as against 30 per cent in February 2021.

"Our channel checks suggest that domestic e-auction premiums reportedly increased further to 300 per cent in March 2022. Within the regulated sector, imported coal-based and merchant power stations, which lack a long-term coal linkage, will absorb the maximum impact of this price rally. Within the non-regulated sectors, steel, cement and aluminium producers will encounter significant cost increases," Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said.

Coming to the domestic coal demand scenario, following a 5.2 per cent year-on-year (Y-o-Y) contraction in FY2021, it has rebounded sharply in the current fiscal year, ICRA said.

"India's coal demand is poised to cross the landmark 1 billion tonne mark for the first time in FY2022, representing a healthy 12-13 per cent growth over the previous fiscal. With a gradual recovery in economic activity, domestic coal demand is expected to grow by a modest 5-6 per cent in FY2023 as per ICRA's baseline scenario," it said.

Looking at the domestic coal availability situation, coal imports are estimated to contract by 14 per cent Y-o-Y in FY22 as users look to replace costlier imported coal with cheaper domestic coal, to the extent possible.

With international coal prices increasing further now, this trend in likely to continue in FY23 as well, putting pressure on domestic miners to ramp up production.

"A high FY2021 year-end coal stock played a crucial role in helping India tide over the energy crisis that surfaced in October 2021. Almost 83 MT of this reserve coal stock was consumed between April 2021 and October 2021 to meet the surge in domestic coal demand following the pandemic," it said.