Friday, September 3, 2010

>COAL SECTOR: Facing demand-supply mismatch

Indian coal industry is the world’s third largest in terms of production and fourth
largest in terms of reserves after the US, Russia and China and also the world's
third largest coal consuming nation after US and China. Around 70% of the total
production is used for electricity generation and the remaining by the steel,
cement and other heavy industries. Coal is also used as fuel for domestic
purposes. About 88% of the total coal production in the country is produced by
various subsidiaries of Coal India Ltd. which is the largest supplier of coal in the

Power sector fuels demand: India has emerged as one of the major buyers of
global coal, with imports doubling in the past four years. A significant portion of
the supply is used by the power utility sector followed by steel (coking coal). For
the current year the coal imports are expected at around 90 million tonnes as
new thermal capacities come up. According to working group on coal and
lignite, the projected domestic availability of coal is 680 million tonnes (mt)
against the projected demand of 731 mt in the terminal year of the Eleventh Plan
period, that is, 2011-12.

Demand-Supply Mismatch: India faces a steep demand supply mismatch with
the power sector growing at a faster rate of 10% while the coal production
clocking in a growth at 5-6%. Currently there is a 10% gap in the demand and
supply of the dry fuel which alone accounts for more than half of the country’s
annual overall demand for commercial energy at 329 million tonne oil
equivalent (Mtoe). As per government estimates coal shortage in India is likely to
touch 15% or 81 million tonnes by the end of the current Plan period that is
March 2012.

Govt initiative: The government has proposed to increase investments in
developing infrastructure at the coal fields. Investments towards regional
exploration, detailed drilling, environmental measure and development of
transportation infrastructure in coal fields will be raised to Rs 400 crore in 2010-
11, from Rs 260 crore in 2009-10. However, Coal India Ltd and Singareni
Collieries Company Ltd, from their internal resources, propose to invest Rs 3,800
crore and Rs 1,335 crore in 2010-11 against provision of Rs 3,100 crore and Rs
634 crore during 2009-10 respectively for increasing production.

Going ahead: The production from Coal India Ltd (CIL) and its subsidiaries is not
able to keep pace with the demand, with economic activity gaining momentum.
Inadequate railway unloading infrastructure is another reason for difficulty in
meeting production targets. The demand-supply gap is set to further widen in the
coming years. Total coal availability in the country by end 2017 would be close
to 647 mt with a projected import requirement of over 86 mt. A major constraint
in ramping up production is the failure of companies to develop captive coal
blocks allotted to them by the coal ministry. The shortage is likely to continue
unless almost all the coal blocks are in production mode.

Our view: The demand-supply mismatch in the coal sector is likely to continue
in the next few years. Power utilities are also importing coal to meet the shortfall
in domestic supply. To reduce the input cost, the companies are also doing
backward integration. In the long term Sarda Energy & Minerals Ltd. remains our
Top Pick on better performance.

To read the full report: COAL SECTOR