India Coal Index continues downtrend in Dec'22, prices may drop further

*Premium grade coal prices slip below year-ago levels
*Prices of high-to-moderately low grades decrease by INR 400-1,600/t m-o-m
*Supply surge to ease concerns of non-power sector
*Domestic miners expected to raise output further in Jan-Mar'23

CoalMint's flagship India Coal Index (ICI) continued on a downward trajectory in December, 2022 shedding some of the spectacular gains seen earlier in the year following a period of supply tightness against the backdrop of elevated power demand.

The ICI is set on a gross calorific value (GCV) basis, comprising domestic non-coking coals from G1-G17 grades. The computation is made by normalising the representative prices for the relevant grades and deriving the final index by use of suitable weightages.

The index, comprising five different indices, is formulated by integrating various non-coking coal grades that are put under the hammer in regular auctions conducted by Coal India Ltd. (CIL) subsidiaries. The ICI follows the movement of bid prices received against the relevant grade baskets.

The monthly weighted average price of premium grade coal representing GCV 6000 decreased by INR 804/tonne (t) m-o-m in December to INR 9,519/t. This is currently assessed below than the year-ago level.

Although the remaining indices are still trading higher, prices have weakened sharply with steady improvement in supplies. Meanwhile, dull market conditions have started to impact buying sentiments negatively.

Overall, the various coal grades surveyed by the ICI have recorded a correction in the range of INR 3,000-6,000/t from their peaks in the April-June quarter.

Ease in buying pressure

The onset of winter in India and seasonal decline in demand has eased the burden on thermal power plants to an extent. Coal-based power generation jumped to a 6-month high of 98.5 billion units (BU) in December 2022, but was still lower than the peak of 105.94 BU recorded in April.

Moreover, power plants have received an extra cushion of support due to rising inventory which rose for the third straight month to 32.32 mnt in end-December.

Again, coal producers have shifted gears to augment supply which happens to be gradually easing the concerns of non-power sector consumers as well. On the back of increased production, CIL dispatched 10.5 mnt to the non-power sector in December, the highest so far in the ongoing fiscal.

Volumes offered at auctions are progressively increasing with a total of 5.94 mnt coal put under the hammer in December. Notably, this was the first time all the eight CIL subsidiaries conducted e-auctions since March last year.

Small-scale industries such as lime and brick manufacturers that are the traditional buyers in e-auctions are still recovering from high prices that have impacted their operating margins.

Meanwhile, traders have taken a backseat after they failed to clear the volumes booked at high prices in the previous auctions. In fact, buyers are now actively procuring material by placing lower bids in anticipation of a further fall in prices.

Preference for imports

Despite abundant domestic coal reserves, India is a leading coal importer as buyers scour the global market for quality material. This trend continued in 2022 as well despite the robust performance of domestic miners.

Although CoalMint data shows that inbound shipments of non-coking coal dropped to a 10-month low of 10.84 mnt in December (continuing the declining trend since July), imports witnessed a strong double-digit growth of 24% y-o-y against 8.74 mnt in December, 2021.

Total non-coking coal imports grew 15% y-o-y to 161.94 mnt in CY22, largely driven by aggressive procurement during the peak summer period. The reliance on imports is also impacting prices in the domestic market, with CIL infusing more of lower-grade coal in auctions at a time when demand looks dull. On average, the volume allocation of premium and high grades was only 22% of total sales during CY22.

Outlook

Imported coal prices are expected to fall with the gradual recovery in trade flows, global supply balance, and increasing domestic coal production, especially in China. This is likely to push Indian buyers to increase seaborne purchases. The fourth quarter of the fiscal is usually the peak season in terms of coal output as domestic miners ramp up production taking advantage of the favourable weather conditions, and so the possibility of a supply shortage can be safely ruled out.

In such a scenario, it looks difficult for domestic coal prices to remain at current levels and a correction is expected in the near term.

India Coal Index

The ICI is assessed on a monthly basis, as per the weighted average prices derived from the regular auctions conducted by CIL taking into account the non-coking coal grade specifications.

* The process involves collection of data comprising bid prices and sale volumes at various auctions conducted by CIL subsidiaries.

* After data standardisation, a Representative Price (RP) is calculated against each grade.

* Finally, these individual grade-wise prices are clubbed into sub-categories, and further normalised to derive the final index for various GCV bands by applying weights.

The index has been formulated in an attempt to provide a mechanism for monitoring the market and for domestic coal price comparison. CoalMint proposes to release the ICI for five distinct grades of coal.