In this week's FinMail we cover the global power crisis which has been looming over the major economies over the world including India. We also understand the reason and the effect of the same.
Imagine a night, with no electricity in town. The sky is as clear as to make the Stars feel closer to you than they ever were. And under this sky full of stars, you are there with your family & friends playing games (probably Antakshari) hoping that the night just goes on. Those were the good old days! No, we aren't making you nostalgic for just anything. We are trying to show you the good side of the memories because soon we might all be living through such blackouts and power cuts.
For those who aren't really up with the news, India is facing a serious power crisis. Thermal Power Stations which power up about 70% of India are facing a severe coal shortage. About 75% of India'sthermal plants are left with less than a week's supply of coal with them. As per data from the Central Electricity Authority (CEA), over 135 coal-fired power plants (50% of the total coal plants), were left with an average of less than 4 days of coal stocks in September-end, down from the average of 13 days at the start of August.
In fact, just when we were drafting the FinMail, news came in that the energy minister of Delhi has warned that Delhi may soon face blackouts from Monday as the coal based plants only have 1 day worth of stock left with them. With this, Delhi too joined the queue with Tamil Nadu & Odisha which have raised concerns over the coal shortage. With Coal supplies depleting and the demand for energy rising, India is staring into a dark future (quite literally).
So in this FinMail, we bring to you the power crisis that has been lurking in India and in the rest of the world and we also discuss its effect and impact on our lives and on the Stock Market. So let's just fire up right away.
Our Dependency on Coal
Despite our efforts to move towards renewable and green sources for energy generation, the majority of the world including India are powered through coal. It is true that the talks of Climate Change and Pollution have been on World Stages for years but it's not an easy task to just switch to renewable energy. The shift doesn't happen overnight or in a year but through many years. So yes, our usage of coal might be decreasing through the years but our dependency on coal for energy hasn't reduced for sure.
Coal lights up about 40% of the world which is still close to its highest share in decades. In India too, over 70% of the nation's electricity demand is met from the energy generated by coal. And that's just not it. Despite being the 4th largest producer of coal in the world, our coal production does not fulfill the demand, so we have to import about 25% of coal consumed, from the countries like Australia, South Africa & Indonesia making us the second largest importer and consumer of coal after China.
So it is pretty much clear that our dependency on coal has nowhere been reduced. And if we are so much dependant on coal, then it is surely going to be a major power crisis if there's no coal available to burn which in fact, is happening right now. So what's exactly the problem behind the coal supply shortage?
Supply Shortage of Coal
When the lockdown shut down the economy, domestic demand for coal fell, followed by a fall in its production & mining. But when the economic activities paced up and India witnessing a 'V' shaped recovery, the demand for coal suddenly shot up as the unlock of the economy led to industries demanding more energy.
Power consumption in the country witnessed a steep rise. As per the latest data, power consumption in June grew by 9% to 114.48 Billion Units (BU), compared to 105.08 BU in June 2020. In August 2021, consumption grew by 18.6% YoY to 129.51 BU which is btw even higher than the pre-covid levels as a result of improved economic activities amid lockdown eases. The power consumption in August 2020 stood at 109.21 BU lower than 111.52 BU in the same month in 2019.
As per the minister of Power, R K Singh, India added about 3 Crore households under electricity in 2020, and most of it being middle-class families, it also led to an increased demand for power as they started adding durable electronics like fans, tube lights, TV, etc.
So on one hand, the demand for energy was rising but on the other, the supply of coal was limited. For those who don't know, around 80% of Coal Mines in India are state-owned (through Coal India) and just like the other PSUs, Coal India has been facing issues over inefficiency. So it was not going to be an easy task to pull off and if this was not enough, the monsoon season in India got prolonged by one month till September and the regions around the coal mines faced heavy rainfall. So the production had to be delayed as a result of flooding in the coal mines. So the gap of rising demand & limited supply got wider & wider leading India into a major power crisis.
But if domestic production was facing problems, can't we fill the gap between demand & supply simply by importing coal? Well,
Global Supply Shortage of Coal
The pandemic had affected every economy in the world and when the restrictions eased, economic activities around the globe geared up. And thus the demand for energy rose sharply as industries & production activities started. The supply, on the other hand, was normal or at par but due to the sudden increase in demand, a gap was created in the supply & demand which led to a substantial rise in the prices of coal. (Economics 101) And this price rise was not limited to coal. A similar rise was seen in the price of gas & other fuel too. The prices of coal increased by over 250% in just a year. Prices of gas rose by 400% in Europe. England has been facing a fuel shortage in their country due to which the military had to be called to tackle any unrest in the country.
And that brings us to the energy crisis that countries all over the world have been facing. China too, being the world's largest consumer of coal is facing the wrath of the shortage which has led to many industries in China shutting down as a result of electricity shortage. The Chinese government has also informed its citizens to start curbing their electricity usage because of the shortage and many towns in China are already facing power outages.
The power shortage in China is such that the Chinese government has been acting as a vacuum that's been buying all the coal available in the international markets to fill the gap. This is also one reason why coal prices have been rising internationally. As a result of the substantial increase in the coal prices internationally, domestic energy plants in India are reluctant to import the coal as it would increase their production cost.
In India, electricity prices are regulated heavily by the government, and electricity producers don't have the permission to keep the cost of electricity variable as per the change in demand and supply and hence there's not much motivation on the producer's end to import the coal at heavy cost because they would have to sell it at a lower rate anyways. And hence the import is out of the question until and unless the government steps in and provides some solution.
So now that we have discussed the reasons behind the energy/power crisis in India and in the world, let's look at the possible outcomes of the crisis and its effect on us.
Effects and Impacts
Coal Inventories in India are at a record low and the power plants are facing a coal shortage of around 60,000 - 80,000 tonnes a day. So, we can't really expect that the coal reserves would be filled instantly. The minister of Energy and Power RK Singh mentioned in an interview that the situation is a "Touch and Go" meaning critical.
If the supply and demand gap doesn't fill in the near future, we could see power outages in the country. The government can implement a systematic power outage in order to tackle the increasing demands. Load Shedding could be carried out by the electricity companies. Electricity companies are resorting to buy electricity in the spot market on the Indian Energy Exchange to meet the demands. As a result, the spot prices of electricity at the Indian Energy Exchange jumped by more than 63% in September to ₹4.4/kw hour.
So we could also see the extra cost being passed on to the end customers - us, and our electricity bills might increase during this period. But as electricity is a common need and a matter of vote bank, authorities might also adapt a balance equation whereby a marginal cost can be passed to the customer along with scheduled power cuts.
To keep the essential services and the normal life running, we might also see the government restricting the cyclical industries to halt their production for some time in order to save the electricity consumed by them and diverting it to the essential uses. Recently, Coal India had reduced the coal supply to the aluminum industry and hence the majority of aluminum plants are now left with only 3-5 days of coal with them. So the halt of production in such industries can lead to reduced economic activity and contribution to GDP.
Coal shortage is staring right at us and if it gets worse there would be no other option left but to slow down some economic activities. Again, this will put a dent in economic growth that too during the midway of pacing up the recovery. So what are the possible solutions that the government of India could adapt? Let's discuss this as well.
No matter, if the price of coal is high & importing it would cost too much. Let's say we pay the price and keep the things as they are. This would ultimately impact the budget of the government if it takes the damage on itself. But if the government doesn't take the hit, it would come down to the consumers such as industries/plants. Their production cost will go up and that too not just marginally. And ultimately this would get passed on to the end customer of course. But industries are trying to procure the coal supply at the minimum cost possible to avoid such situations.
According to one article published in Bloomberg, Indian industries are buying Australian coal that’s been lying ideally inside the ports of China for months due to a bilateral problem between the two countries. The Coal that's been lying around for months is being diverted to other countries and some of it is even being bought by Industries from the port itself at a discount compared to fresh shipments from Australia. Industries have bought nearly 2 million tons of Australian thermal coal that has been sitting in warehouses at the Chinese ports, according to the report.
Ramping up the Local Production
Coal India Ltd (CIL), which is the world’s largest coal producer & accounts for nearly 80% of India’s domestically mined coal has been asked to level up its coal production in order to meet the rising demand. India is also targeting to eliminate the import of thermal coal by 2024 in which CIL will play a crucial role. So yes, pushing the supply from within the country is on the government's list definitely and if the government is planning to go 'Aatmanirbhar' this might be an opportunity in disguise for India.
Using Captive Mines
Last Tuesday, the government notified that they have made amendments in the rule that will allow the captive mines to sell 50% of the annual coal and lignite outputs.
Captive mines are those mines that are owned by some institution, that mines coal for their sole use and not for selling it in the open market. Captive mines are operated by end-users of coal such as steel and power sector firms, etc.
This move is likely to benefit operators of 100 coal and lignite blocks, with an annual production capacity of 500 tonnes. It will motivate the owners of such mines to produce more coal now they are permitted to sell extra coal (up to 50% of total coal production) after keeping aside the coal for their own use.
Though it was supposed to be beneficial in the longer term, it came at a time when the country is facing a coal shortage. But what is the use of such information if we can't use it to apply it to the Stock Markets.
Effects on the Stock Markets
Everything comes down to the Stock Market after all isn't it? Be it a crisis or a situation of economic expansion, we all want to take every opportunity available to create some money out of it.
So let us understand how this particular crisis is going to affect the Stock Market. Now as we know, out of any situation that's been panning out in the economy, some companies and sectors are going to turn out as beneficiaries and some are going to turn out as losers in the situation. So here too, let's take a look at the stocks and sectors that have and might come into focus as a result of this.
(Please note, that this is just a perspective of ours and not an investment advisory. So please consider this as an educational purpose only)
So from the crisis, it is pretty much clear that Coal India, who has/will be playing a major role will come into focus. And the effect of it might have already come into the focus as its share has rallied by 31.5% from 31st July till Friday close. Another state-owned company Gujarat Mineral Development Corporation Limited (GMDC), involved in the mining of coal & minerals, has also gone up by 10.9% in the same period.
Indian Energy Exchange Ltd which is involved in energy trading has gained the most out of it, as its stock has gone up by a whopping 61%.
Govt a few days back also allowed the owners to captive mines to sell 50% of their produced coal in open markets. Steel Authority of India Ltd (SAIL), Hindalco Industries, and Adani Power Ltd. are some of the major captive miners in India, likely to remain in focus if they could pull out extra coal over & above their personal requirements.
Now as the cyclical industries like Aluminium and Steel have a risk of production gets halted due to low supply, their stocks might also come into focus and move accordingly.
So that was basically it - The Power Crisis of India & the world. Whoo would have imagined that we would witness a crisis like this. But the last few years have been years of Surprises so we can never guess what would happen next. Guess this is not just it. See you on the brighter side most probably ;)
That is it for this week's FinMail, keep learning. Switch off the lights as our Moms tell us and we will see you in the next week.
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