Coal Shortage in India Threatens its Manufacturing Sector

Coal Shortage in India Threatens its Manufacturing Sector

November 19, 2021

Executive Summary

  • India has been facing a shortage of coal since mid-August after demand for power rose in the manufacturing sector following a deadly second COVID-19 wave.
  • In October, coal supply at over half of its thermal plants hit a critical low, with an average of less than 4 days of coal reserves left. The annual monsoon season as well as remnants of inclement weather brought by Cyclone Galub to Maharashtra state in late September impeded domestic coal transport to a wide array of industries.
  • In response, Coal India issued directives to send a large share of coal to critical sectors like power thermal plants to prevent power outages. Meanwhile industries like iron, steel, aluminum, textiles, cement, and paper that extensively use coal for daily operations have been forced to operate at reduced capacity.
  • The acute coal shortage has caused domestic coal prices to increase by an estimated 15 percent between July and October, while the price of imported coal soared to 61 percent during this period. As winter season approaches, coal prices are likely to increase further, subsequently affecting prices of iron, steel, and aluminum in production costs in the coming months.

Generating more than 70 percent of its electricity from coal, India currently faces a power crisis as inventories of coal have fallen sharply in recent months. During early to mid-October, over half of the 135 thermal plants in India had an average of less than 4 days of coal reserves left against the recommended level of 15-30 days. An increased demand for electricity following the restart of the manufacturing sector after the relaxation of COVID-19 lockdowns, an import slowdown due to high global prices, and the impacts of the monsoon season which impeded mining activity were some of the factors that have contributed to severe coal shortages in the country.

Coal inventories at thermal plants in India have been running low since August when the number of power plants with less than 8 days of coal reserves had more than doubled. The situation worsened by early October, when more than 75 percent of the 135 power plants had less than a week’s supply of coal. Rajasthan, Maharashtra, Andhra Pradesh, Punjab, and Karnataka are among the hardest-hit states where power plants have been forced to shut down recently. These are also the states where many Life Sciences and Health Care and automotive manufacturers are located, especially in Maharashtra and Karnataka states.

Coal inventories shrink significantly from mid-August

As of November 14, the Central Electricity Authority (CEA), which monitors daily coal stock levels at 135 power plants across India, reported a total of 67 power plants in India with critical coal reserves, i.e., less than 9 days’ supply. 63 of these are non-pithead power plants, which rely on transport of coal from mines that are not located nearby. For the plants located more than 1,000 kilometers from a coal mine, the CEA’s standard guidelines require them to always maintain a 30-day supply of coal. 

In early September, authorities in India launched a multipronged effort with the aim to increase coal stocks at power plants, prioritizing supply to the electricity units carrying a stock of zero to six days. As a result of these efforts, the situation has begun to improve in the first week of November. A total of17 power plants faced coal shortage in mid-October, at the time of writing, the number had decreased to 5. (see Figure 1).

 

Figure 1: Number of plants at selected dates with critical/super critical stock levels. Source: Central Electricity Authority, Daily Coal report
Stock in days (critical/super critical)

No. of plants

(Aug 15)

No. of plants

(Sep 1)

No. of plants

(Sep 15)

No. of plants

(Oct 1)

No. of plants

(Oct 13)

No. of plants

(Nov 1)

No. of plants

(Nov 14)

0 day285151725
1 day8862327128
2 days1015171720109
3 days713161914179
4 days10171716141313
5 days9215512179
6 days2141287513
7 days0211111
8 days0010000
TOTAL4879901041127767

Several states begin load shedding amid coal shortages

In light of the power crisis, the following regions across India have implemented intermittent rotational power cuts, with some lasting up to 14 hours:  

 

  • Northern region: Punjab, Haryana, Rajasthan, Uttar Pradesh 
  • Southern region: Andhra Pradesh, Tamil Nadu  
  • Eastern region: Bihar and Jharkhand  
  • Western region: Gujarat 
Figure 2: Map of Indian states highlighted by average current stock of coal in days as of November 14. Source: Central Electricity Authority, Daily Coal report

According to the CEA, some of the most impacted regions in terms of remaining coal reserves are Karnataka, Rajasthan, Maharashtra, and Andhra Pradesh, which have had 5 days or less coal reserves as of November 14 (see Figure 2). These states are currently at the greatest risk of having to shut down power plants in the coming weeks, which could potentially result in sudden power cuts. These states are home to some of the most important industrial clusters, including Bengaluru in Karnataka, Pune and Mumbai in Maharashtra, and Sri City in Andhra Pradesh.

Energy-heavy commodity industries at high risk of production cuts

Due to the inventory shortage, manufacturing plants relying on coal for their operations have been forced to reduce their production capacity, in particular iron and steel, aluminum, textiles, and paper industries.

Aluminum   

Coal accounts for about 40 percent of the production cost in the aluminum industry. This is because aluminum smelting requires uninterrupted power supply for production. Any power outage that lasts for 2 hours or more can result in freezing molten aluminum in the smelters, which can lead to the shutting down of the plant for at least six months, thereby incurring heavy losses and restart expenses. Aluminum, being the second most-used metal after iron, is critical in consumer products, including electronics appliances, food packaging, foils, cans as well as for industrial appliances such as automotive, aircrafts, ships, trains, railroads, defense, and communication equipment for aerospace. Indian aluminum plants are grappling with the ongoing coal supply shortage with no alternative materials to support their power requirements and to keep the plants operational. Amid the coal crisis, the aluminum industry is currently recognized as a non-essential sector and thus, only receiving around 20-22 carriages of coal daily from Coal India. In normal circumstances, the industry receives around 50 carriages of coal per day.

Steel   

While there have not been any reports of production halts in the steel industry at the time of writing, secondary steel mills relying on non-coking coal for production may face production cuts as steel plants are paying three to four times more to procure coal amidst the scarcity. Secondary steelmaking is an important tier prior to primary steelmaking, as it melts scrap iron, which is mixed with carbon to be converted into steel to manufacture various products like consumer electronics or automobiles. 

Textile  

About 400 suppliers of cotton and rayon textile processing units in Surat, Gujarat have been hit hard due to the soaring coal prices. Coal is an important commodity used in boiling and steaming of prints and dyes in the textile industry. Amid the coal shortage and rising cost of procuring color and other chemicals over the last two months, several manufacturers have planned to reduce production from 6 to 5 working days in November in Surat, Gujarat. In addition, the monsoon season had also hampered domestic coal transportation, prompting textile producers to depend on coal imports from Indonesia to continue running their operations. If working hours are reduced, it will impact 60,000 textile suppliers and 500,000 workers in the textile industry in Surat; if textile mills lead to shutdowns, migrant workers are likely to leave which could cause a shortage of labor.

Paper  

Five paper mills in Vapi, Gujarat have suspended production since September as electricity rates have soared due to coal shortages. Paper mills, like the textile industry, use coal in the boiler to generate steam, which is used to dry wet paper. Paper mills use either coal imported from Indonesia or source local lignite coal, while some use a mixture of both. In Uttar Pradesh state, 35 paper mills have also voiced their concerns when the decision was taken by the coal ministry to prioritize the supply of coal to power thermal plants last month.  

Outlook

Union Coal Minister Pralhad Joshi has committed to increase coal supplies to power plants with the aim to expand stocks from 7.5 million tons to 10 million tons by the end of 2021. The country has been planning to maintain strategic reserves of imported coal and natural gas to prevent power outages and future supply shortages. By reallocating reserves to several areas with low stocks in recent weeks, India has increased stocks in some places for the immediate future. Indian Railways’ also plans to expand coal transport around the clock, which could further ease supply shortages for industries that rely on coal in the coming weeks, as the monsoon season subsides.

However, as precedents indicate, energy consumption needs by households are expected to be cut down as winter season approaches. India’s air pollution normally hits its peak during winter months due to smog emitted by various sources including power thermal plants, putting pressure on coal–based power generation. When air quality worsens, authorities mandate thermal power plants to be shut down temporarily as part of its emergency measures. With low inventory of coal and the possibility of shutdowns in winter, it may enable prices to continue at an upward trajectory.  

The acute coal shortage has already caused domestic coal prices to increase by an estimated 15 percent between July and October, while the price of imported coal has risen by about 61 percent in the said period. The rise in coal prices may further affect production costs of iron, steel, and aluminum, which could potentially prompt manufacturers to reduce production in the coming months, further hampering the country’s economic recovery plan from the pandemic.

Recommendations

Customers should consider increasing visibility of potential risks across their multi-tier supply chains by mapping out suppliers in various locations to understand risks exposures. This can be done by using Everstream Analytics’ Supplier Risk Assessment to help identify which suppliers may be subject to production halts or reduced production capacity from the coal shortage.  

As coal mine operations are commonly hampered by adverse weather conditions like heavy rainfall or approaching winter months, customers are advised to keep abreast of the latest developments through Everstream Analytics’ Intelligence Monitoring and Applied Meteorology capabilities.

As the coal crisis can impact a wide range of industries, customers in aluminum, paper, textile, iron, and steel are advised to get in touch with key suppliers to assess business continuity plans for logistics and supply in the days and weeks to come. Customers should consider contacting alternative suppliers in other geographical locations to mitigate potential supply shortages and delivery delays.  

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