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  • Directorio de Eficiencia energética

India Ratings: Sufficient Supply and Renewable Alternatives to Put Pressure on Coal prices.

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 India Ratings and Research’s (Ind-Ra) price assumption for the benchmark thermal coal (Newcastle 5,500 calories) for FY18-FY20 is a band of USD50-60 per tonne. Government policies in large seaborne trade participants and persistent substitution to renewable energy are likely to have a significant influence on coal prices. Ind-Ra’s price assumption is based on expected full cycle costs, comprising expected cost of production of major global merchant miners, cost of finding and development, rate of return on investment and global demand-supply levels.

Competition from Renewable Alternatives: Competition from renewable energy will continue to increase, with technological advancements reducing capital costs. Renewables contribution to global primary energy needs is likely to grow at a faster pace, increasing to 4% by 2020 from the current estimated 3.0%.

Tightrope Walk by China: Two-thirds of China’s energy requirements over FY18-20 are estimated to be met by coal. The relaxation of supply control in 2016 was aimed at preventing a delay in mining capacity rationalisation, ensuring sufficient energy supply and profitability of power producers. Hence, the risk of reversion of restriction on mining days is limited.

Expansion in India’s Domestic Coal Volume: India’s domestic coal production is all set to increase on account of government efforts to reduce imports. The higher target is partly to be met by production in coal blocks fraught with clearances issues. Ind-Ra expects domestic coal consumption growth in India to remain tepid on account of subdued demand from thermal power plants, with an expectation of plant load factor remaining sub-65% in the medium term, as indicated in FY18 Power Sector Outlook and FY18 Infrastructure & Project Finance Outlook reports. Given domestic coal availability is likely to increase, thermal coal imports are likely to decline by 15-20 million tonnes annually over the next two-three years. This would affect global seaborne trade.

Steady Demand for High-Quality Coal: Freight costs and volume-based taxes make an economic case for steady demand for high-quality coal. For instance, India doubling clean energy cess to INR400 per tonne reduces the economic value of low-quality coal.

Supply Discipline: Ind-Ra believes investment in new coal projects is likely to remain subdued globally due to gloomy long-term demand prospects. Many top global suppliers may not invest in raising output, creating a strong floor for prices. China has committed to cut 800 million tonnes of capacity over 2016-2020; it had cut about 250 million tonnes as of October 2016.

Coking Coal Supply Constraints: Although coking coal prices are likely to weaken in FY18 due to a production recovery in Australia and China, the average price for the full year may continue to remain high compared with that for 1HFY17 due to continued supply-side constraints and low inventory levels. However, with the restart of idle sites and new capacity ramp-ups, supply from top producer countries could improve in FY19. Ind-Ra estimates medium-term price of coking coal at about USD100 per tonne.

 

SENSITIVITIES

Positive: Reinstatement of lower mining days and higher-than-expected capacity curtailment by China, increased regulatory constraints on exports, major upward revision in royalties or taxes, any force majeure events constraining global mining activities or global supply movement may pose an upside risk to prices.

Negative: Higher-than-expected volume ramp-ups by large global miners and proliferation of renewables, major downward revision in royalties or taxes, and/or major decline in global economic activity may pose a downside risk to assumed prices.

 

Price Assumption

 

Years

1QFY17

2QFY17

3QFY17 

4QFY17

FY18E

FY19E

FY20E

Long-Term

USD per tonne

             

 

Australia Newcastle (5,500 Calories)

44

58

74

66

60

50

50

55

Coking Coal (Imports from Australia by China)

81

94

184

222

150

95

100

100

Source: Ind-Ra assumptions                                                                                                            

 

* The purpose of Ind-Ra’s forecasts is not to predict the actual commodity price, but to provide a foreseeable operational and financial profile commensurate with a rating that is likely to survive the inherent cyclicality in the sector, including commodity price fluctuations.

 

Business | News published on 13 / 07 / 2017 by Rashmi Nargundkar

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