JPMorgan: India Coal Industry report

India Coal Industry
Demand-supply mismatch positive for miners;
domestic pricing trends key to watch



While coal production to increase, so would the deficit. Some key themes
likely to evolve in India's coal market include…: lower supply of coal against
linkages to smaller segments like cement. Coking coal deficit is likely to
worsen in sync with increasing blast furnace capacity. We estimate India's
coking coal imports to increase to 50MT in FY14E from 23MT in FY10. We
expect India's thermal coal production to increase by a CAGR of 7.7% over
FY10-14E, but consumption is likely to increase by a CAGR of 10.1% over the
same time, implying thermal coal imports to increase to 93MT in FY14E from
44MT in FY10. With the captive mining blocks not ramping up as expected and
the recent GO/NO GO issues regarding new mining block development, it
means domestic supply is unlikely to see meaningful increase (at least in sync
with consumption). Logistics infrastructure would need to keep pace with
increasing coal production. Pithead coal inventories have increased 3x over
FY01-10 even as some of the non utilities buyers have had to resort to
market purchase of coal, due to logistics issues.
• Indian Coal- Demand not a constraint, can pricing become more market
driven?: Whether India’s coal suppliers can achieve a more market driven
pricing mechanism for their coal would have implications not only for its
profitability but also for the user industries. As of now other than the hikes in the
notified prices (where the user are mainly utilities), quasi market pricing is there
only for e-auction coal sales, (10% of volumes), higher grade thermal and
coking coal and beneficiated coal sales. A large part of Indian coal is currently
at a steep discount to landed imported coal (admittedly it has higher ash content
and lower calorific value). We do not expect any sudden move towards full
market pricing. Beneficiation of coal has so far not taken off in India on a large
scale (even as Indian coal has high ash and relatively low calorific value)
• Potential regulatory changes to be watched for?: We believe potential
regulatory changes which incentivizes higher private sector participation, and
speeding up of regulatory clearances are key to watch out for. The final
provision in the proposed new MMDR bill and implications for coal companies
also key to watch