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Capacity additions in power to drive domestic non-coking coal demand
Non-coking coal consumption is expected to increase at a CAGR of 6% to about 962 million tonnes (MT) in FY2021 from 710 MT in FY2016, driven bycoal based capacity additions of 44 GWin power sector. Over the same period, domestic supply is anticipated to grow at a strong pace of 8.5% CAGRto 955 MT from 635 MT. The growth in production will be driven by rising production from Coal India Limited (CIL) as well as commissioning of a largecaptive coal blocks primarily allotted to PSUs such as the Pakri Barwadih and Parsa East & Kente Basan (15 MTPA each). Consequently, share ofimports in non-coking consumption is forecast to fall to 10% in FY2021 from 18% in FY2016. In absolute terms, non-coking coal imports are estimatedto decline to 94 MT in FY2021 from 129 MT in FY2016.
Rising steel production to drive domestic metallurgical coking coal demand
Steel production through the pig iron / hot metal route is expected to grow at a CAGR of 7 per cent over the next five years with demand growth insectors such as construction, infrastructure & automobiles. The production increase will be supported by about 17 MT of crude steel capacity additionsfrom major players like Steel Authority of India Limited (SAIL) and Tata Steel. We expect consumption of metallurgical coking coal to increase to 81 MTin 2020-21 from 59 MT in 2015-16, a CAGR of 6.5 per cent.
Domestic coal prices revised upward in FY2017; Next fiscal could witness further hike driven bywage revision
Our view on coal prices under various mechanisms is as described below.
Linkage prices: Linkage prices, which were last revised in May 2016 are expected to be revised upwards again in FY 2018. CILs employeecosts (50% of operating cost) are expected to rise going forward with the finalization of the pending wage revision. This rise in costs is expectedto put increased pressure on the companys profitability. In the second and the third quarters of FY2017, the company provisioned Rs. 7 Billioneach, resulting in the margins contracting sharply. Consequently, we expect CIL to hike linkage prices, in order to offset the increasing costs andsupport profitability
E-Auction prices: CIL typically sells 10-12 per cent of its total sales through the e-auction route. In FY2018, we expect the demand from theend use sectors which remained tepid in FY 2017, to rebound. For instance, the demand from the cement sector, which increased at a tepidpace of 2-3% owing to demonetization, is expected to rebound in FY 2018. However, the lower prices of imported coal, are expected to reducedemand for domestic coal, thus capping the price hike.