As the demand for coal in India increases, the wrestling between India and China in obtaining sufficient coal supply to support rapid economic expansion may intensify.
India and China consumed more than 60% of global coal production last year. At the same time, the substantial increase in thermal power installed capacity and the completion of new steelmaking plants may continue to drive the growth of coal demand in both countries for at least 20 years.
The two countries' strategy of obtaining overseas coal supply and the use of domestic coal resources will become decisive factors.
Credit Suisse estimates that India’s annual coal consumption in 2020 will increase from 613 million tons last year to 1.8 billion tons, and coal imports will rise from 81 million tons to 500 million tons.
China, a long-term net exporter of coal, became the first net importer of coal last year. This changed the pattern of the Asian coal market and also brought export earnings to coal suppliers such as Indonesia and Australia.
According to the International Energy Agency, China imported 1.14 tons of coal in 2009, ranking second only to Japan with a net import of 165 million tons.
As China’s demand for overseas coal has soared, countries that previously exported coal to India have now become the targets of China’s struggle and global coal prices have risen as a result.
China used to import coal mainly from Indonesia, Australia and Vietnam. Now it is looking beyond Colombia, the United States and Canada.
In the face of China’s challenges, India has played a huge geographical advantage. India is closer to South Africa, the main coal producer, than China, and its transportation costs are lower.
Analysts from Macquari said in a summer research report that in the past, South African coal was mainly exported to countries in the Atlantic region, and now 75% of them have flowed to India and Pacific countries.
India has also strengthened its trade relations with Indonesia, which supplies India's coal accounts for about 80% of India's total coal imports.
However, India’s strategy of relying heavily on traditional suppliers is difficult to sustain. On the one hand, the Indonesian government hopes to retain more coal production for domestic use. On the other hand, South Africa's labor problems and transportation problems have not been resolved.
This situation is prompting India and China to step up competition for overseas coal assets.
Andrew Driscoll, head of CLSA's resource research department, said that China's major coal companies have ambitions for overseas M&A, and they have strong balance sheets for protection. Their focus seems to be that of Australia, Indonesia, and Mongolia.
Private companies in India have also purchased several assets overseas. Their state-owned coal company Coal India and NTPC Ltd. (532555.BY) is also developing a similar plan.
However, analysts questioned the rationality of this move.
According to Arun Srivastava, executive director of Ernst & Young's infrastructure department, investing in overseas assets is expected to meet recent demand, but it is obviously not an effective way to ensure long-term low-cost supply.
Compared with China, India lacks impressive achievements in overseas energy investment. China has huge cash reserves and it has an advantage in terms of funding. Many analysts believe that China’s exchange rate is undervalued and that China has also taken the lead in this regard.
Dealogic said that in the past three years, the amount of Chinese companies spending on overseas coal mining acquisitions has reached US$20.96 billion, and India has only US$2.09 billion.
India also lacks a unified overseas acquisition strategy. Although the Indian government announced earlier this year that it wants to establish sovereignty for overseas energy purchases, it has not issued specific plans.
China and India also have different positions at the negotiating table. China's coal imports amount to only 3.8% of domestic production, compared with 20% in India.
China's coal imports are driven by many temporary factors, such as inventory reconstruction, drought in the southwest, domestic coal mine rectification, and a fiscal stimulus plan of 4 trillion yuan.
Macquarie said that China's import of coal depends on prices, not non-buy.
Ernst & Young's Srivastava said that this has enabled China to gain the upper hand at the negotiating table and has greater options than India in negotiating supply agreements.
And if necessary, China can reopen small coal mines that have been shut down due to security problems. At the same time, China still has a lot of unexploited coal resources.
In contrast, India's mining technology is backward, the society is not stable, the bureaucracy is prevailing, and the pollution problem is serious. As a result, the country’s coal industry is hard to return.
Chirag Shah, an analyst at IDFC-SSKI, said that the bottleneck in coal supply has attracted attention within the Indian government, but it still lacks a sense of urgency to solve the problem.