The recent firmness in India’s coal imports, which has been the main reason for increased rates in the Panamax market, is likely to continue as the Indian government’s plan to invest heavily in infrastructure will underpin domestic coal demand.
Panamax rates have skyrocketed in 2019 and are likely to rise in the coming quarters supported by strong demand for coal imports in India.
The demand for electricity in India is expected to expand at an increasing pace over the next five years. Even though the share of renewables and gas-fired power plants will surge, demand for non-coking coal will remain high because of the low penetration of gas-fired and renewable-based power plants. Meanwhile, the government’s focus on infrastructure development will generate additional demand for steel, in turn, increasing imports of coking coal.
The major consumers of non-coking coal in India are power plants and cement industry, while that for coking coal is the steel industry. The Indian finance minister, in her budget speech on 5 July 2019, proposed to invest $285 billion annually over the next five years on infrastructure – a surge of more than 150% compared with the past investment. The government has allocated the highest-ever budgetary support of $12 billion to the highways sector. In the past, such ambitious plans in India have failed to materialise because of a lack of funds. However, the recent initiative is expected to be implemented as the government seeks to mobilise alternative financing resources, including an effective asset monetisation strategy.
Major Indian infrastructure initiatives planned over the next few years include: the dedicated freight corridor, urban transportation projects through the PPP model, affordable housing projects, commitment of fresh investment in electric vehicles and an impetus on a national-level water and gas grid through ‘One Nation One Grid’ initiative to contain the inefficiencies and loses in power and water distribution.
The above-mentioned initiatives will result in a massive surge in demand for steel, cement and power. The spurt in demand for cement has already generated huge requirements for non-coking coal imports this year. India’s cement production has increased to more than 337 million tonnes in FY 2018-19, a rise of more than 13% from the previous financial year despite a policy paralysis in the run-up to the national election concluded in May 2019.
It takes about 200 kilograms of coal to produce one tonne of cement. Therefore, to produce 337 million tonnes, the Indian cement industry consumed 67 million tonnes of coal in FY2018-19. With the new government firmly in place with emphasis on infrastructure, the demand for cement is expected to surge over the next few years. Additionally, with increased industrial production, coal demand for power generation will also expand.
Moreover, domestic coal production has been increasing at a very slow pace, leaving power companies to depend on coal imports. For instance, domestic coal production increased 5% until May 2019, but imports surged 29%.
The inability of domestic coal producers to match domestic demand will keep imports high over the next few quarters. However, the Indian government plans to commercialise coal mining, which will boost domestic production and cut imports; this will take time and until then coal consumers will have to rely on imports for a large part of their requirements.News Source: Drewry