Industry Trend Analysis - Privatisation Of Coal Sector To Support Long-Term Output - MAR 2018

BMI View: India's coal sector will benefit from the government's efforts to privatise the industry, although we do not expect reforms to have a tangible effect on production for a number of years due to the long-term time frame needed for implementation and ongoing delays in the policy process. We believe Indian coal production growth will accelerate towards the end of our 2018-2027 forecast period once reforms take effect, bolstered by strong domestic power generation demand and robust steel production in the years ahead.

On February 20 2018, the Indian Cabinet Committee On Economic Affairs (CCEA) approved auctioning coal blocks for commercial mining by the private sector, as originally introduced by The Coal Mines Special Provision Act of 2015. Prior to the Act of 2015, non-state commercial mining in India was legally only allowed for captive use, that is for exclusive use by the company that mined the coal and not to be sold to other parties in the domestic or international markets. The new measure will end restrictions on the sale and use of the fuel after more than four decades of near-monopoly by state-owned Coal India and will aim to reduce reliance on imports.

The liberalisation of the coal sector in India will be positive for domestic coal production as it will likely lead to a moderation of prices, as supply constraints currently in place due to the highly restrictive nature of the industry are eliminated, while investment from domestic and international private players is set to increase. However, we only expect these developments to have an impact on production towards the latter half of our forecast period from 2018-2027, owing to the slow pace of reforms in the sector to date and the time required for private players to develop newly auctioned coal deposits. Longer-term production will be further sustained by solid coal demand for power generation and a growing steel sector. As a result, we expect coal production growth in India to gradually accelerate during our forecast period, averaging 3.1% over 2018-2022 and 3.7% over 2023-2027.

Coal Production Growth To Accelerate Steadily
India Coal Forecasts
e/f = BMI estimate/forecast. Source: USGS, BMI

Reforms To Have Limited Impact In The Short Term...

We expect sluggish implementation of government-proposed reforms across the coal industry will curb growth potential in the short-term. For instance, since the Indian government's 2015 move to allow private players to enter commercial coal mining (although with restrictions on specific end-uses) only just over a dozen mines of the 31 auctioned have actually started operations due to subdued interest from companies. Furthermore, the decision announced earlier this month to allow commercial mining of coal without any specific end-use, comes after a year of delays, having first been announced in February 2017. The auction-date for the coal blocks was intended for April 2017 but are yet to be auctioned as of February 2018. Were auctions to begin effective immediately, it is estimated they would take a year to be completed (March 2019), while it would take a further number of years for private companies to setup the necessary mining infrastructure. As a result, any significant increase in production from the auction will not be felt for at least the next two to three years. To date, state-owned Coal India continues to account for 80% of domestic coal production.

Coal To Dominate
India Electricity Generation By Type (TWh)
e/f = BMI estimate/forecast. Source: EIA, BMI

...But Will Contribute To A Solid Longer-Term Outlook

We are more positive on Indian coal production growth potential on a five to ten year time-frame as auctions are completed and mining projects begin commercialisation. Indeed, we expect a number of private players (domestic and international) to eventually show interest in the auction of mines, due to favourable domestic market conditions underpinned by a bullish energy consumption outlook and a growing steel industry. On the energy-side, BMI's Power team expects India to remain largely dependent on coal in order to fulfill the country's electricity generation needs for the foreseeable future. The fuel will remain the only realistic option for providing cheap and abundant energy for the local population over our forecast period to 2027. The share of coal in India's overall electricity mix will remain steady over the coming years as the majority of its natural gas reserves are deemed uneconomical given the current extraction costs. Furthermore, despite the rise of intermittent renewable sources, such as wind and solar, increases in the power mix and a baseload fuel to balance the grid will continue to support demand for cheap coal. We forecast coal generation will account for 74.2% of total energy generation in 2026, only slightly lower than the 74.9% currently.

Steel Production To Support Coking Coal
India - Steel & Coking Coal Production Growth (% y-o-y)
Note: 2014 is the most recent historical data available. Source: BMI, Bloomberg

As an added tailwind to domestic coal production, we expect strong growth in the Indian steel industry over the coming years. While coking coal only accounts for under 10% of India's total coal industry, its use in the production of steel will nevertheless provide additional support to coal production in the country, as the domestic steel industry balloons. Historical data indicates a solid correlation between steel production growth and coking coal production growth in India over the past few years (see chart above). We are forecasting average annual steel consumption growth of 10.2% over the next ten years driven by demand from infrastructure and autos production growth, which combined account for 30% of Indian steel consumption. On the supply side, production will be supported by the government's objectives outlined in the National Steel Policy of 2017. The Indian steel industry has been earmarked as a strategic sector in need of development by the Modi government, as it looks to meet rising domestic demand projected over the coming years.Objectives include reaching 300mt of annual production by 2030, increasing domestic availability of coking coal in order to reduce import dependence on coking coal from 85% to 65% by 2030-31 and increasing India's presence in value added steel.

Coal Price Forecasts
Geography Indicator 2016 2017 2018f 2019f 2020f 2021f
f= BMI forecast. Source: BMI, Bloomberg
Global Thermal coal, USD/tonne, ave 65.7 88.2 80.0 65.0 65.0 67.0
Global Coking coal, USD/tonne, ave 143.2 189.3 160.0 150.0 140.0 140.0

Downside Risk: Lower Prices May Hinder Profitability And Production Ahead

Our core view is that coal will continue to have a strong presence in India, just as in other emerging markets such as Vietnam, Pakistan and Egypt, due to its price competitiveness ( See 'Commodities Of The Future: Long-term Changing Consumption Patterns', April 6 2017). However, as the privatisation of the domestic coal industry progresses in the coming years, the lack of government-backed support for private producers will mean these may become more vulnerable to price fluctuations on the global market. Our bearish coal forecasts over 2018-2022 will therefore increase the risk of slower than expected coal production in the country, if this leads to unsustainable low profitability among domestic mining companies. We forecast coking coal and thermal coal prices to head lower in the coming years due to slower demand growth from China, as the government there aims to curb pollution levels and increasingly shift economic policy away from heavy industry into services.