5 key drivers of India’s protracted coal crunch

India is continuing to grapple with a severe and protracted power crisis after a sustained surge in global coal prices in late-2021 was further aggravated by Russia's invasion of Ukraine in February.

The global price pressure eroded India's import volumes and reduced its power plant stockpiles to critically low levels just as an unrelenting heat wave pushed demand to unprecedented levels. The country generates more than 75% of its power from coal, and is the world's third-largest producer of electricity at 1,383 TWh/year.

The crisis is so severe that government authorities in India – the world's second-largest coal producer, importer and consumer after China – are threatening to cut domestic coal supply to power plants that are reluctant to import coal at current elevated prices.

But how did it get to this?

Global coal prices surge 30%

The current deficit, the second such coal shortage since October 2021, was initially triggered by the sharp rise in global coal prices in mid-2021.

In early 2022, before Russia invaded Ukraine, Indonesia's most popular coal grade, Kalimantan 4,200 kcal/kg GAR coal, traded at $65.45/mt FOB. Since then, the disruption in global coal supply has led to a near 30% surge in the grade's price to $86/mt on June 9, according to S&P Global Commodity Insights data.

Key suppliers reroute cargoes to Europe

The surge in prices gathered further pace as countries that once relied on Russian coal started scrambling for alternative supplies from the US, South Africa, Australia and Colombia.

The price of Australia's 5,500 kcal/kg NAR coal with 23% ash has surged 83.6% year to date to $189.95/mt FOB June 9, according to S&P Global data.

Indonesia and Australia were among the largest exporters to India in the financial year 2021-22 (April-March), together forming 66% of India's import basket, according to India trade ministry provisional data.

Domestic supply ramps up but falls short

To meet India's rising power demand as COVID-19 restrictions eased, the government first tried to boost domestic coal production, which rose to 777 million mt in FY 2021-22 from 716 million mt in FY 2020-21, coal ministry data showed.

India has long harbored ambitions of reducing coal imports to zero by 2030 and state-owned Coal India has said that it targets hiking its domestic production to 1 billion mt coal by FY 2023-24.

The government has also tried divesting coal blocks to private companies in recent years to incentivize them to increase India's overall coal production.

Stockpiles fall to critical levels

Several years of the ambition to be fully independent from coal imports fell flat in April when stockpiles fell below the critical threshold level of being sufficient for eight days.

From being in a comfortable position of over 50 million mt in April 2020, the stockpiles at power plants had fallen to 23.88 million mt as of June 8, according to the Central Electricity Authority. A total of 96 power plants reported critical coal stock levels on the day out of 173 thermal coal power plants in the country.

As coal stockpiles dwindled to critically low levels, summer weather arrived early, leading to extremely high power demand.

Domestic coal-based power production could not keep pace with the surge in electricity demand and India began to experience widespread power shortages more severe than anything the country had seen in at least seven years.

Monsoon eases demand, but impedes production

While the arrival of the monsoon has provided a breather for power demand for the moment, the rainy season is expected to impede domestic coal production.

India's federal power ministry is currently scrambling to get an estimate of the coal shortage outlook for September and has asked the world's largest producer of coal, Coal India, to procure coal on behalf of power plants at federal, state and other levels.

With the global coal supply expected to remain tight in H2 and winter still some months away, coal shortages and power outages may well remain a pressure point for India for the rest of the year.

With contributions from Rituparna Nath, Anupam Chatterjee and Wendy Wells