India Blackouts: India and China Increasing Coal Demand Could Lead to a Global Energy Crisis

India received global attention after the historic blackouts last month that put over 600 million people in the dark. Following the media aftershock thereafter, one thing was made abundantly clear: coal is existential for developing economies.

India and China are heavily dependent on thermal or non-coking coal for electricity generation. In India, for instance, 60% of electricity capacity is dependent on coal-fired generators. In China it’s as high as 80%. As a result, both countries have been characterized as drivers (and dampeners) of the global thermal coal market – and the demand is indeed robust. In the last fiscal year, India purchased $3.5 billion worth of thermal coal, importing up to 42 million tons from trade partners like Indonesia and South Africa. That number is expected to double this year.

For India, things have been hard. State-run suppliers like Coal India Ltd. have consistently come up short in honoring contracted requirements for power produces that need coal to fire their generators. Over 32,000 mega watts of power projects have been shelved or delayed because of shortages and other regulatory hurdles. India’s energy calamity has been met on the other hand by China, who currently faces an oversupply. Stockpiles at Qinhuangdao, China’s largest port in the Hebei Province, have bulged to nearly 6.9 million tons, as 131 ships wait in queue to offload coal.

While mounds of coal are now visible on satellite images of Chinese ports, India set the record for the world’s biggest recorded power outage. Why is there such an extreme imbalance between the front-running economies of the world?

For one, China finances coal purchases unlike any country in the world. Upon entering into purchase agreements for commodities like coal, Chinese banks open a split letter of credit to make payment on goods, remitting only 90-95% of the cost to the seller. The remainder is sent after goods are inspected at the discharge port. No other major buyer in the world, including India, splits payment in this manner. This arrangement can protect the Chinese when coal prices fall, as it is then possible to withhold payment of the remaining 5-10% on technicalities, forcing sellers to discount goods. This arrangement has given them a competitive advantage in the international market, allowing them to import more at lower prices.  

Secondly, India is at a critical disadvantage to the Chinese having a fraction of the resources and infrastructure. With only four ports to handle capsize vessels, or cargo ships carrying 150,000 tons of coal, the country is physically unable to import as much as China. Upon reaching India, ships vie for available ports and sometimes wait long periods to berth, incurring demurrage, or fees associated with a ship’s extra use. This occurs so often that Japanese shipping companies have in some cases refused delivering goods to India as circuitous port logistics have led to unpaid demurrage, as no one is willing to take the liability.

These key differences between India and China preempt the question on their relative demand for coal. With 20% of new electricity capacity sitting idle, the demand for coal in India is obvious. In the case of China, things aren’t as clear. Excess inventory at ports has posed serious doubt on China’s genuine demand for electricity. Are they urbanizing as fast as the market is predicting?  Perhaps not. Even while local and provincial government officials herald stable electricity production and consumption, one has to question the mounds of unused coal. Speculation on the demand from China has become so nebulous, that analysts have started to factor in a so-called ‘rationalization’ of Chinese behavior into their forecasts.

However, the consensus that seems to resonate with both India and China is their shared domestic supply limitations -- they need to import coal. And India is fraught with problems at home.  Considering delays on environment clearances, the ongoing mining rights scandal so aptly named ‘Coalgate,’ and the more recent political motivation by Rural Development Minister Jairam Ramesh to put a 10-year moratorium on new mining projects in the eastern states because of Maoist insurgencies, India will have to look outside its borders to solve the coal crisis.

By forming a buyer’s cartel, power companies can import more from Indonesia and South Africa through long-term supply agreements at lower cost. Indian companies should also look to non-traditional suppliers of coal, similar to the agreement signed by Abhijeet Group with mines in Kentucky and West Virginia to import 9 million tons of American coal a year for 25 years, a $7 billion deal.  Coal India Ltd. will also have to buck up by reconsidering approval on the price-pooling mechanism that was struck down by the board earlier this month. The mechanism would allow the state-controlled company to import more, meeting at least 80% of its fuel supply agreements to power producers.

Innovative partnerships coupled with long-term contracts would reduce India’s dependence on the spot market for coal imports. They’d also shed a stigma that has put Indians in the dark at the dawn of the country’s emergence on the world stage.

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S. N. Kapadia

Writer, traveler, businessman. Samir N. Kapadia was featured on the cover of The New York Times for his work at Gateway House: Indian Council on Global Relations in Mumbai, India. His writing has been published in Mint - A Partner of the Wall Street Journal, Business Insider, The Daily Caller, Breitbart and PolicyMic. Independent Dissertation, University College London (UCL); BA, Georgetown University

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