Explained: Why India is facing a coal shortage

The scarcity of coal in India is generating a power crisis, which threatens to disrupt the world’s fastest-growing economy. Coal-fired power stations had an average of 4 days’ worth of fuel on hand at the end of September 2021, the lowest level in years and down from 13 days at the beginning of August. Over half of the facilities are on high alert for outages. With coal accounting for over 70% of energy generation, spot power costs have risen, while supplies of the fuel are being shifted away from critical clients such as aluminum smelters and steel mills.

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Reasons behind the coal shortage:

Following the second coronavirus pandemic wave, India’s industrial electricity consumption has increased. Furthermore, a growing price disparity between reduced domestic prices and record global coal prices has caused purchasers to avoid imports. Coal India, which produces more than 80% of India’s coal, said on Wednesday that an increase in global coal prices and freight costs had resulted in a reduction in power production by plants using imported coal, putting additional pressure on utilities using domestically mined coal to boost up output.

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Reasons behind the widening price gap between domestic and global coal:

Coal India controls the majority of domestic coal pricing in India. Coal price increases typically have a knock-on impact on electricity costs and inflation, making a hike politically sensitive. Despite global coal prices climbing sharply over the previous year, Coal India has maintained its rates stable. While the company’s chairman has stated that the miner would raise prices, it is unclear when this will occur.

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How India’s crisis will impact the global coal market:

India is the world’s second-largest coal importer, consumer, and producer, with the fourth-largest reserves. It mostly sources its imports from Indonesia, Australia, and South Africa. According to statistics gathered by Kplr, India’s average weekly coal imports from August to late September, when global coal prices surged more than 40% to all-time highs, fell by more than 30% from the first seven months of the year to just under 3 million tonnes. The most recent week’s import total was less than 1.5 million tonnes, the lowest in at least two years, and the websites of main coal-importing state utilities did not include any fresh tenders for new cargoes this month.