Coal crisis: How power crunch imperils India's non-power industries

Even as the coal supply crunch jeopardises possible power disruptions across the country, several non-power industries, encompassing steel to oil refineries, also face a looming risk to their operations.

India is dependent on coal as it is the primary fuel for 70 per cent of the country's energy consumption. As of October 11, over 80 per cent of the 135 coal-fired power plants in India had less than four days of stocks left, according to the Central Electricity Authority.

Although the Narendra Modi-led government has maintained that there is no coal shortage several states have reported coal shortages and have warned of possible power outages in the coming days.  

On Wednesday, in a bid to stabilise the situation, Coal India Limited (CIL) had directed its subsidiaries to prioritise the power sector in the distribution of coal and also keep from conducting any further e-auctions till the situation settles.  

Here are some important non-power industries that are expected to be affected due to the looming coal crisis:  

Iron

The prices of imported coal have reached a record high amid the coal shortage. Due to this the production costs of commodities such as iron, steel and aluminium are expected to rise. The shortage may even cause the scaling down of operations.

“Due to the current situation, the domestic sponge iron producers could pass on the cost-increase to end-users,” Ritabrata Ghosh, Assistant VP and Sector Head, Corporate Sector Ratings, ICRA told India Today.

"While the price of domestic coal has increased by an estimated 15 per cent between July and October of 2021, the rally in imported coal prices has been much steeper, with prices reaching all-time high levels, and registering a sharper increase of 61 per cent between July and October of 2021. This is expected to result in an increase of about $75/MT between this period for a domestic sponge iron producer," Ghosh added.  

He further noted that even though manufacturers have been able to partly pass on the cost increase to customers (12 per cent increase in sponge iron realisations since July), the gross contribution of such players is estimated to be lower by around Rs 1,800/MT in October 2021 compared to July 2021.  

"This suggests that margins would come under pressure in the second half of FY2022 unless manufacturers roll out further price hikes," Ghosh conveyed.

"For an integrated billet manufacturer having facilities for captive sponge iron, waste heat recovery power generation, and captive power plant, between July and October of 2021, the extent of cost increase due to this coal price rally is estimated to be around $60/MT," he added.

Steel  

Some major steel manufacturers have their own power production units and are not currently facing an energy crisis. However, market players are of the opinion that the next two months will be critical for steel producers unless the current coal shortage is dealt with.  

Smaller steel mills that depend on electricity supplied by power plants could face production setbacks if they experience power outages caused by the coal shortage.  

"While the prices of steel billets too mirrored the trends in sponge iron (increasing by 11 per cent between July and October of 2021), the hikes for billet manufacturers have been adequate to absorb the full cost increase due to coal shortage," Ghosh said.

Oil Refineries  

Oil refineries are likely to experience a jump in demand if the coal shortage continues. The country’s major oil refineries are not dependent on coal and are not expected to witness any power outages.  

However, any increase in demand may lead to LNG imports, the prices of which have surged in the international market.

Smaller manufacturing units such as plastic and synthetic rubber, which are dependent on coal, could continue to operate via diesel generators. However, this is likely to lead to a jump in the production costs of these units.  

Frozen Food

Power outages are expected to have a major impact on the frozen foods industry as it among the most vulnerable sectors. The industry can rely on diesel generators for electricity in case of power outages. However, this would inflate the operational costs and negatively impact profits.  

Poultry, meat and dairy industries are expected to face similar challenges in case of a power shortage.

Brick Kilns/Cement  

The majority of brick makers in the country are dependent on imported coal as fuel. With coal prices soaring in the international market, brick makers may fall back on the domestic supply of coal. This will put further strain on the already stressed supply chain.

Also Read: Coal India not to e-auction till stock situation stabilises

Also Read: Coal India temporarily halts supply to non-power customers, says report