Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas

By Jason Simpkins
Associate Editor

Over the past decade, India has blossomed into an industrial and technological powerhouse.  And two of the nation's strongest performing sectors have been steel and power, which have provided resources so vital to India's rapid growth.

Unfortunately, those sectors are faced with a major shortage that has restricted their growth - a tightening of the coal supply, the one resource both industries rely most heavily on.

India's energy sector is dependent on thermal coal for power plants and coking coal for steel, both of which have been in short supply recently. India has the fourth-largest coal reserves in the world, but so far the domestic coal mining industry has been unable to keep pace with demand.

Coal is one of the primary sources of energy, accounting for about 69% of total energy demand in the country. And the World Coal Institute expects energy consumption to rise by as much as 8% to 10% annually through 2020. According to Tata Power Co. Ltd., if India is going to maintain an annual growth rate of 8% a year, it will have to double the capacity of its power industry by 2015.

Energy companies aren't the only ones feeling the squeeze...Last year, state-owned Steel Authority of India, the country's biggest steel producer, imported 70% of its coking coal needs while Rashtriya Ispat Nigam Ltd. imported 90%.

In an effort to combat its supply deficiency, India is joining some of the other nations of the world that boast big foreign exchange reserves and is launching a government-owned investment company to buy stakes in overseas coal producers and secure future supplies. The project will marry a multitude of companies from varying sectors under a single umbrella to ensure regional prosperity.

State-run Coal India Ltd., will lead the new investment coalition, which will also include Steel Authority of India, Rashtriya Ispat, National Thermal Power Corp. and state mining agent National Mineral Development Corp.

"This is a first of its kind in India, where government companies belonging to different ministries have joined hands in this way," India's Secretary for Steel, RS Pandy, said in an interview with the Financial Times.

Of course, not everyone believes that Coal India Ltd. has the solution to India's supply and demand gap.

"They have a plan to take production up to 750 metric tons by 2012, but if they actually believe they can do that I think they are in denial," Gerard McCloskey, chairman of the McCloskey Group, told the Financial Times.

Even RS Pandy admitted that there is no escape from imports.

"Since they're going to almost double their steel capacity in the next three years or so, their dependence [on imports] will be substantial," he said.

Also, if India began making acquisitions now, it would be doing so at the height of the commodity boom - meaning it will have to pay top dollar for any companies the state-run fund acquires.

"They are going to enter the market probably at absolutely the top of the resource boom," said McCloskey, whose research group specializes in the coal market.

The price of coal coming out of South Africa's Richards Bay Coal Terminal, the world's largest, has jumped 86% so far this year. The terminal shipped 7.3 million metric tons of coal to India in the first 10 months of the year according to Bloomberg.  That number could rise another 2 million tons by year's end, according to the terminal's shipping coordinator, Donovan Raj.

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