IGI Logo

India’s blackout risk to ebb, but normalisation may take a while

The primary reason behind India’s coal shortage crisis is that coal production has not been in sync with bunched up demand after the pandemic shock. This resulted in a sharp decline in coal inventory in 1H2021; inventory further fell precipitously during the monsoon season. We believe it will take 3-4 months to reach the 21 day inventory norm. Power shortages could impact several ‘manufacturing’ states and may cause supply-side inflation in the short term. We believe power engine businesses such as Cummins, & Kirloskar Oil Engines can benefit from this theme.

* The risk of black outs: India’s coal shortage crisis emanates from the precipitous decline in coal inventory at power generation plants, with NTPC inventory declining to 3-4 days, compared with the 21-day norm. Concerns have permeated across the country, worrying industrial as well as agri-dominated states, which are flagging risks of severe power cuts.

Over half of the 135 coal-fired utilities, which supply more than half of India’s electricity, have fuel stocks to last just under 3 days (See here). The government attributes the crisis to several factors, such as: a) an unprecedented rise in power demand on the resurgent economy, b) heavy rains in coal mine areas and c) cutback in power generation from plants that depend on imported coal due to a steep rise in prices.

* Unanticipated impact of pandemic on seasonality is the real problem, not consumption upsurge: We analysed the trends in power consumption, coal production, dispatches and inventory levels. The main reason for the power crisis is the inability to align coal production, dispatches and power generation to the disturbance caused to the usual demand seasonality of these variables by the pandemic lockdown and re-opening.

Stronger-than-expected post-lockdown demand revival in 3QFY21 and the earlier part of 1H2021 saw both coal dispatches and production considerably lagging, thereby leading to a decline in inventory days from 20+ in Dec’20 to 10 in Jun’21 and further to 4-5 by end-Sep’21. The rise in prices of imported coal and gas also accentuated the pressure. We note that the strength in revival in power consumption in recent months is only against the backdrop of a rather weak demand scenario in FY20 and 1HFY21. However, a comparison with FY19 indicates that revival is still fairly modest.

* It may take 3-4 months to normalize, several agri and industrial states impacted: Assessments of state-level consumption demand and states’ dependence on coal-based power supplies indicate that economic activities would be impacted in industrial such as Maharashtra, Tamil Nadu, Gujarat, Karnataka and Andhra Pradesh as well as agridominated states such as West Bengal, UP and Madhya Pradesh. We believe the minimum 21-day inventory norm would take at least 3-4 months to reach. The potential impact on manufacturing and agriculture can trigger supply-side inflationary pressures.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

Above views are of the author and not of the website kindly read disclaimer