• Widespread coal shortage across India impacts industrial production

    04 December 2018

    The nationwide coal shortage in India due to supply and demand-side inventory mismanagement since September 2017 has started to impact industrial manufacturing throughout the country. What started as a prioritization issue of expending domestic and Indonesian-imported supply by Coal India has now ballooned into an industry-wide shortage that threatens to impact key sectors.

    The material shortages can be attributed to mismanagement. Coal India is responsible for 80% of coal production in the country, a majority of which is used in coal-fired power plants. Industry sources allege that the Coal Ministry has decided that independent power producers would be the priority recipients of coal. This prioritization, however, is to the detriment of captive power plants operated by manufacturing plants.

    Further to this, the state-run firm’s explanation for supply shortcomings is due to the unavailability of rail coal cars. The decision made by the federal government on September 22 to allocate rail cars to coal plants instead of manufacturing facilities has resulted in the rail car unavailability in its current state. As a result, transportation of coal from mines as well as the coal-importing terminals at Mundra, Paradip, Vinshakhapatnam, and Krishnapatnam has been impacted.

    Productive industries have taken note of this prioritization. The Aluminum Association of India has requested a halt to the government’s power production prioritization as the status quo has endangered aluminum production. The association is one among many represented by the Indian Captive Power Producers’ Association; other members include representatives from the steel, cement, and paper industries. Their grievance also stems from the lack of fulfillment of a contractually guaranteed 75% coal receipt from the Coal Ministry, which is currently between 15 to 50%, which the Ministry attributes to decreased capacity in alternative energy sources. As a result of these allocation strategies, aluminum, cement, steel, and paper producers will continue to face shortages in the short-run. This may, in turn, impact raw material exports as well as the Indian domestic automotive industry, among others.

    The issue has also been exacerbated by climate factors, as coking is only successful with dry coal, a state threatened annually by the monsoon season. Based on domestic demand and the intensity of storms during the season, coal imports are a necessity. For example, from 2017 to 2018, India’s coal imports rose 35% from 15.6 million tons to 21.1 million tons by September 2018. Moreover, increased heat waves in recent months have led to increased demand for energy units by 180 billion units, or a 1.15 % increase on a monthly basis. Predictions also show an elevated rainfall during the wet season compared to previous years. As such, sectors from energy through manufacturing will require ever-increasing quantities of coking coal, predominantly from South Africa and Indonesia.

    As a result of the coal-to-aluminum shortage, several critical industries throughout India are reporting production slumps. In addition to a slump of 4.3% in mining productivity, down from 9.3% in the previous year, there is also production shortcomings reported in Indian original equipment manufacturers, like Eicher or Tata. Should these shortages continue, even more considerable domestic sourcing difficulties may transpire, and create upward pressure to source raw materials abroad. Supply chain managers should therefore be mindful of these conditions and plan accordingly.

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