metals & mining 14oct21 su

Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited

Power paranoia: Shortage, not a crisis

We view the current power shortage as largely a consequence of: i) a sharp uptick in international coal prices, leading to a major generation loss of 2%; and ii) seasonally low production at Coal India. However, we see it as a hiccup as supply-demand balance is likely to get restored over the next 45 days as a result of Coal India ramping up production and current high demand easing off post-festive/Rabi season.

Besides, the government’s intervention of allowing PPA-based power plants to sell on exchanges should help. That said, merchant prices may continue to trend higher from INR6–10/kWh. Coal India, IEX, Tata Power, JSW Energy and Adani Power are the likely beneficiaries. NTPC’s under-recovery is also a low probability.

India’s ad hoc power shortage: Missing the woods for the trees

While it is convenient to blame Coal India (CIL) for power blues, the main reason is

the highest-ever global thermal coal prices on record. Global coal prices have

skyrocketed (up 3x since May-21) owing to a combination of China’s clampdown on

domestic coal production and covid-19-induced logistical bottlenecks. This has led

to a generation loss of 2% (at the country level) owing to subpar PLFs (down 2,050bp

5M average) at imported coal-based plants (8% of thermal installed). Besides, a

surge in power demand due to festive/agri season, high residential demand and no

power cuts in election-bound states amid seasonally low coal production, tightening

receivables by CIL - leading to offtake rationalisation for some discoms – and

manpower issues at MCL worsened the situation.

CIL’s production ramp-up on track – India’s escape route

With generation from imported coal-based capacities at an all-time low, domestic

coal-based capacities did the heavy lifting, thereby lowering plant level and CIL

inventories (overall down from 127MT to 49MT in last six months). Despite an

extended monsoon, CIL’s production has ramped up to 1.5mt/day – the highest

since FY19 – and is likely to go up further. Unlike 2015, coal availability and logistics

have improved materially. Hence, the recovery is likely to be faster.

Outlook: A temporary mismatch; demand destruction unlikely

The current issue is only temporary and seasonal in nature given power demand is

likely to ease off post-November (festive season and onset of winter). It provides a

window to increase domestic coal production, which is imminent (H2 - 60% of

production). This could lead to a fall in spot prices, but we don’t expect a sharp fall.

From a stock perspective, this benefits CIL on two counts: i) volume incentives for

higher offtake; and ii) higher e-auction coal prices, thus aiding realisations.

Merchant power players are likely to benefit as long as economics between

imported coal and merchant prices works. Regulated power plants may face little

hindrance for maintaining 85% PAF as CIL’s ramp-up is on the cards. Our channel

checks indicate that non-power users such as Hindalco, Vedanta and Shyam

Metalics are relatively unaffected owing to stocks lasting up to Jan-22.

India Equity Research Metals & Mining and Power October 18, 2021

METALS & MINING AND POWER SECTOR UPDATE

Amit Dixit Meera Midha Swarnim Maheshwari Manoj Kumar K V +91 (22) 6620 3160 +91 (22) 4088 5804 +91 (22) 4040 7418 [email protected] [email protected] [email protected] [email protected]

METALS & MINING AND POWER

Edelweiss Securities Limited

2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset

Spiralling imported coal prices have led to…

Source: Edelweiss Research, Bloomberg

…sub-optimal PLFs at imported plants…

Source: Edelweiss Research, CEA

…leading to 2% generation loss

Source: CEA, Edelweiss Research

Power demand: Growth intact


Depleting coal inventory is a temporary issue…

Source: Coal India, CEA, Edelweiss Research

…with CIL ramping up well

Source: Coal India, Edelweiss Research

40

66

92

118

144

170

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

Oct

-17

Oct

-18

Oct

-19

Oct

-20

Oct

-21

USD

HBA Marker 6322 kcal

15.0

25.0

35.0

45.0

55.0

65.0

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

Jun

-20

Sep

-20

Dec

-20

Mar

-21

Jun

-21

Sep

-21

%

Weighted Average PLF

3.7%

1.7%

2.0%

0.0%

0.8%

1.6%

2.4%

3.2%

4.0%

Apr-Aug'21 Sep'21

%

Decline in generation

Imported coal power generation (% of overall generation)

-30.0

-15.0

0.0

15.0

30.0

45.0

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

Ap

r-2

1

Jul-

21

Oct

-21

e

(%)

Power demand growth (%)

10

35

60

85

110

135

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

(MT)

Overall coal Inventory (CIL + Plants)

0.9

1.3

1.7

2.1

2.5

2.9

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

(mt/

day

)

FY16 FY17 FY18 FY19

FY20 FY21 FY22



Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

Indian power demand comes back strongly

Post a brief period of lockdowns-led downturn, Indian power demand is on a

recovery mode with pickup in Industrial & commercial activity. This coupled with

high power demand due to festive/agri season, residential demand (high

temperatures) and no power cuts (non-negotiable) in election-bound states

catalysed a strong uptick in power consumption. During the first fortnight of Oct-21,

India witnessed strong demand growth of 3.4% YoY (on a high base of 12%).

Power demand has been growing


Demand is normally higher in festive season


Chinese demand-supply mismatch sends coal prices spiralling up

International thermal coal prices have soared over the last 12 months globally,

making new historical highs every month. Indonesia thermal coal surged 220% YoY

to USD161/mt.

Indonesian coal price touched all-time high of USD161/mt in Oct-21

Source: Bloomberg, Edelweiss Research

-30.0

-15.0

0.0

15.0

30.0

45.0

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Jul-

20

Oct

-20

Jan

-21

Ap

r-2

1

Jul-

21

Oct

-21

e

(%)

Power demand growth (%)

75.0

80.0

85.0

90.0

95.0

100.0

Jan

Feb

Mar

Ap

r

May Jun

Jul

Au

g

Sep

Oct

No

v

Dec

BU

's

Average Demand (FY11-20)

Festive season

40

66

92

118

144

170

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

Oct

-16

Oct

-17

Oct

-18

Oct

-19

Oct

-20

Oct

-21

USD

HBA Marker 6322 kcal




Generation cut amid lower import coal offtake:

This has impacted coal offtake (down 57% in last six months) of import dependent

thermal power plants - constituting 8% (~18GW) of total thermal power capacity in

India.

Domestic imports of non-coking coal has ranged at an average of 15mt/month prior

to May-21. However, as thermal coal prices soared, imports also came off to a mere

8-9mt/month. This is mainly as power plants along western coast that were designed

to handle imported coal started incurring losses.

Thermal coal imports have come off sharply

Source: Industry, Edelweiss Research

As a result, these imports-dependent power plants cut down operations sharply to

a mere PLF of 16% in Sep-21 as against 37% PLF’s in past five months. Overall, this

led to a generation loss of 2% (as % of total thermal power generation) during Sep-

21.

Coal imports-based plants had to cut generation…


…resulting in loss of 2% in overall power supply


5

8

11

14

17

20

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

(mt)

15.0

25.0

35.0

45.0

55.0

65.0

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

Jun

-20

Sep

-20

Dec

-20

Mar

-21

Jun

-21

Sep

-21

%

Weighted Average PLF

3.7%

1.7%

2.0%

0.0%

0.8%

1.6%

2.4%

3.2%

4.0%

Apr-Aug'21 Sep'21

%

Decline in generation

Imported coal power generation (% of overall generation)




Domestic coal-based plants ramp up to bridge the gap

Amidst this, domestic coal-based power plants have ramped up operation to bridge

the gap from reduction in power contribution from imports-based power plants.

During H1FY22, domestic coal-based power plants operated at an average PLF of

~57% (52% last 3 years average) as compared to 33% of imported coal based power

plants.

Domestic coal-based plants compensated for imports-based plants

Source: Company, Edelweiss Research

Coal Inventory depletes to a low of 49mt

A higher offtake has resulted in coal inventory trending down for 6 months straight,

to 49MT (Coal India at 41MT and plant-level at 9MT). Particularly, inventory at

power plants dipped sharply by 37% MoM in Sep-21, resulting in stocks at 104 power

plants falling below critical level.

Higher offtake leads to sharp fall in coal inventory


…and 104 plants falling below critical stock level


30.0

37.0

44.0

51.0

58.0

65.0

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

%

Weighted average PLFs (Domestic coal based plants)

10

35

60

85

110

135

Sep

-19

No

v-1

9

Jan

-20

Mar

-20

May

-20

Jul-

20

Sep

-20

No

v-2

0

Jan

-21

Mar

-21

May

-21

Jul-

21

Sep

-21

(MT)

0

25

50

75

100

125

Sep

-19

Dec

-19

Mar

-20

Jun

-20

Sep

-20

Dec

-20

Mar

-21

Jun

-21

Sep

-21

(no

of

pla

nts

)

No. of plants with Critical Stock (<7 days)

No. of plants with Super Critical Stock (<4 days)

Total Plants with critical stock levels




High coal prices/ demand leads to high spot price


States’ withdrawal from exchange has risen


0

3.5

7

10.5

14

17.5

Oct

-20

No

v-2

0

Dec

-20

Jan

-21

Feb

-21

Mar

-21

Ap

r-2

1

May

-21

Jun

-21

Jul-

21

Au

g-2

1

Sep

-21

Oct

-21

(IN

R K

wh

)

IEX price

-

270

540

810

1,080

1,350

Gu

jara

t

AP

Har

yan

a

Pu

nja

b

Tam

il N

adu

UP

MU

s

MU's




CIL production: Not the core issue

CIL’s production in Sep-21 has been highest-ever

CIL’s production rate in Q1CY21 was lower compared to previous years as the

company had historically high levels of inventory at end-Mar-21. That said, in

Q2FY22, CIL’s production has been the highest-ever at 1.34-1.37mt/day. Despite an

extended monsoon, production has ramped up to 1.5mt/day—the highest since

FY19.

CIL’s production rate in Q2FY22 has been higher than past


Going ahead, we expect CIL’s production to pick up as per the precedent years.

Nearly, 60% of the production is in H2 post monsoon and stabilisation of mine

geometry.

Bulk of CIL’s production takes place in H2


CIL’s pithead stock is higher on seasonally-adjusted basis

As a result of production rationalisation, CIL’s pithead stock is down to 38mt by Sep-

21 end, a level still seasonally high compared to past seven years barring FY17.

Hence, in our view there still exists adequate stock at the pithead.

0.9

1.3

1.7

2.1

2.5

2.9


(mt/

day

)

FY16 FY17 FY18 FY19 FY20 FY21 FY22

0

20

40

60

80

100


(%)

H2 H1




CIL’s pithead stock is higher compared to past barring FY21


15.0

33.0

51.0

69.0

87.0

105.0


(mt)





Offtake has been higher than past

Offtake rate has been unprecedented every month in FY22

Admittedly, CIL’s offtake has been at highest level (seasonally adjusted) thus far in

FY22. Thus far in October as well, offtake is at 1.73 mt/day—higher compared to the

same months in the previous years. It is interesting to note that despite offtake

increasing in the second half of every year, inventory has also increased mainly due

to production ramp-up.

Offtake has remained firm


Inventory depletion velocity has been much higher than past

CIL’s inventory depletion rate has been in the range of 0.2-0.5mt/day in 6MFY22—

higher than prior years. Despite this, the pithead inventory is higher than previous

years.

Inventory depletion has been higher


1.0

1.2

1.4

1.6

1.8

2.0


(mt/

day

)


(0.5)

(0.2)

0.1

0.4

0.7

1.0


(mt/

day

)





Power sector: CIL’s core focus still

It is interesting to note that the offtake increase to the power sector by CIL is up 11%

YoY in Sep-21 and 24% YoY in 6MFY22. Furthermore, the increase in sales volume to

captive power plants (CPP) has been 39% YoY in Sep-21. The higher offtake to power

sector has been compensated for by lower volumes to cement, sponge iron and

other segments that might see a cost escalation as cost of imported coal has

progressively moved up.

Sector-wise breakdown of CIL’s sales volume

Sector-wise break-up Sep-21 Sep-20 Sep-19 6MFY22 6MFY21 6MFY20 % increase (YoY)

Sep-21 6MFY22

Power 40.4 36.5 28.8 245.8 197.8 217.4 10.7 24.3

CPP 4.1 3.0 2.6 19.1 20.4 23.5 38.6 -6.3

Steel 0.2 0.2 0.3 1.1 1.0 1.1 5.3 12.2

Cement 0.2 0.4 0.3 1.8 1.9 2.8 -40.0 -3.7

Sponge Iron 0.5 0.7 0.6 3.5 4.4 4.9 -16.9 -19.8

Others 2.9 6.0 2.8 36.5 29.0 26.1 -52.0 25.6

Total 48.3 46.6 35.3 307.9 254.5 275.7 3.6 21.0

Source: Ministry of Coal, Edelweiss Research

Captive mines production is mainly for power generation

Captive mines ramped up production in Sep-21. Against 9% of CIL’s production in

Sep-20, the production by captive miners has increased 59% YoY to 6.9mt (almost

14% of CIL’s production). However, the bulk of incremental production is by power

plants with captive mines.

Steel companies are still sourcing their thermal coal requirement from Coal India

rather than operating their mines. Cement companies on the other hand have

increased production by 300% YoY (on a low base) as they are unable to procure

enough coal from CIL.

Sector-wise breakdown for captive mines

Sector-wise break-up Sep-21 Sep-20 Sep-19 6MFY22 6MFY21 6MFY20 % increase (YoY)

Sep-21 6MFY22

Power 6.4 3.8 4.0 35.9 25.7 24.0 66.9 39.8

CPP - - - - - - NM NM

Steel 0.4 0.5 0.7 2.4 3.5 4.3 -10.4 -32.3

Cement 0.1 0.0 0.0 0.3 0.2 0.3 300.0 30.0

Sponge Iron - - - - - - NM NM

Others - - - 0.0 0.1 0.0 NM -80.0

Total 6.9 4.3 4.7 38.6 29.5 28.6 59.4 30.9


Response to e-auctions remained tepid

In 6MFY22, CIL offered 98.7mt of volume for e-auctions, of which only 53.3mt (54%)

was booked. Furthermore, the average premium over notified price was merely

30%. In special spot auction for coal importers as well, a mere 2.3mt of 3.1mt offered

was booked. Average e-auction price was INR3,015/t for this category.




E-auction parameters for 6MFY22

E-auction (6MFY22) Spot Special forward Exclusive non power Special spot Special spot for coal importers Total

Quantity offered 22.9 40.5 28.2 4.1 3.1 98.7

Quantity allocated 12.2 17.3 19.7 1.7 2.3 53.3

Booking value 28,430 19,229 28,902 2,865 6,884 86,310

Premium over notified price 42.0 22.0 25.0 15.0 44.0 30.0

Price 2,325 1,109 1,463 1,642 3,015 1,618


For Aug-20, 62% of the total quantity offered was booked. There was very high

demand for exclusive non-power and special spot for coal importers. However,

demand in case of spot auction was moderate and in case of special forward auction

low.

E-auction price for special spot auction for coal importers was INR3,449/t compared

to global price of INR6,497/t. In our view, there are two reasons for the low offtake

despite the apparent disparity in price: i) the grade differential between CIL’s coal

and imported coal might have been large; and ii) logistics from the subsidiaries

conducting e-auctions might not have been feasible.

E-auction response even in August has been largely tepid

E-auction (Aug-21) Spot Special forward Exclusive non power Special spot Special spot for coal importers Total

Quantity offered 4.2 14.1 9.5 0.0 0.7 28.5

Quantity allocated 2.7 6.4 8.0 0.0 0.6 17.7

Booking value 7,712 7,826 11,678 - 2,097 29,314

Premium over notified price 74.0 31.0 45.0 0.0 29.0 46.0

Price 2,870 1,227 1,464 3,449 1,661





The curious role of receivables

CIL’s receivables had escalated to a peak of INR231bn by Mar-21 end compared to

an average of INR80bn from FY11-FY19. The situation was particularly acute at ECL

and BCCL—together accounting for 36% of the receivable and 25% of revenue for

FY21. Also, the receivable days at these subsidiaries were over 100 compared to just

58 days for CIL on average. In FY22, CIL resorted to rationalising offtake to discoms

that did not clear pending dues. Most of these discoms were in the states served by

ECL, BCCL and CCL.

Until Aug-21, CIL had reduced receivables by 15% to INR196bn. Our channel checks

indicate further reduction of INR40–50bn over past 45 days. We believe that if coal

shortage persists, we might see CIL treading the fine line between receivable

optimisation and offtake rationalisation

Receivables are still at a high level

Subsidiary Aug-21 Mar-21 Mar-20 Mar-19 % chg (Mar to Aug)

ECL 39.2 47.9 33.2 16.2 -18.3

BCCL 27.3 36.4 24.1 6.1 -24.9

CCL 35.7 42.1 24.9 11.0 -15.2

NCL 25.3 31.2 18.5 9.5 -18.8

WCL 32.9 34.6 13.5 3.6 -5.1

SECL 23.9 24.7 16.5 3.9 -3.2

MCL 11.3 14.3 13.2 4.7 -21.1

NEC 0.1 0.1 0.1 0.0 0.0

Total 195.6 231.3 144.1 55.0 -15.4

Source: Company, Ministry of Coal, Edelweiss Research




Why this is not FY15

Production capabilities of MCL and NCL are very different now

Unlike FY15, the production rate of key subsidiaries- NCL and MCL have gone up

significantly. Production at MCL in 6MFY22 was at a record 70.7mt compared to

merely 55mt in 6MFY15. NCL has been the best-performing subsidiary over the past

two years, the only one meeting its target at Coal India.

NCL’s production has seen a quantum leap to 53.5mt in 6MFY22 compared to just

29.7mt in 6MFY15. While production at ECL, BCCL, WCL and SECL has largely

remained stagnant, we expect improvement at SECL as land acquisition issues are

largely behind.

MCL and NCL have ramped up production significantly

Subsidiary 6MFY22 6MFY21 6MFY20 6MFY19 6MFY18 6MFY17 6MFY16 6MFY15

ECL 14.3 18.1 20.8 20.4 16.7 16.1 15.1 16.0

BCCL 12.4 10.1 11.7 14.6 13.6 16.6 16.7 16.1

CCL 25.3 20.3 22.7 22.8 20.9 23.7 24.8 21.6

NCL 53.5 53.6 51.0 48.4 42.8 36.6 35.2 29.7

WCL 18.4 16.5 17.5 16.6 15.2 14.0 18.4 17.8

SECL 55.1 53.7 60.7 72.2 61.3 59.0 59.3 54.4

MCL 70.7 63.9 56.5 61.2 61.4 63.8 60.0 55.0

NEC 0.0 0.0 0.1 0.2 0.1 0.1 0.1 0.1

Total 249.7 236.1 241.0 256.5 231.9 229.8 229.6 210.8


Wagon loading in FY15 suffered mainly due to erratic law and order issues at CCL

and MCL, delay in finalisation of ESM road transport contracts at SECL,

transportation constraints at WCL and CHP problem at various projects of NCL. Rake

availability has improved significantly to 242/day in Sep-21 from 194/day in FY15.

Furthermore, evacuation infrastructure has been augmented over the past five

years. The major railway infrastructure projects already completed are:

1. Tori-Shivpur New BG line catering to North Karanpura area of CCL and capable

of evacuating about 32mt of coal.

2. Jhasuguda-Barpali-Sardega Rail link relates to Basundhara coalfields of MCL and

has augmented evacuation capacity by 34mtpa from MCL

3. East Corridor (Rail JV- CERL) rail link falling under SECL. The railway link between

Kharsia and Korichapar was commissioned in FY21.

As a result, wagon loading at MCL and NCL has seen good growth. While wagon

loading at ECL and BCCL has not gone up mainly due to aged mines and labour

disputes, respectively, we believe that MCL and NCL are likely to drive growth.




Rake availability has improved considerably

Subsidiary Actual (Sep-21) FY15 FY14 FY13

ECL 15.2 18.2 18.0 17.8

BCCL 20.6 22.3 22.2 20.8

CCL 33.6 25.4 25.2 27.3

NCL 30.2 20.4 20.9 18.7

WCL 21.7 16.1 15.7 15.2

SECL 36.8 31.8 34.3 32.9

MCL 83.8 59.8 53.5 50.8

NEC 0.0 0.7 0.4 0.6

Total 241.9 194.0 189.7 183.4

Source: Company, Ministry of Coal, Edelweiss Research




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Aditya Narain

Head of Research

[email protected]

metals & mining 14oct21 su

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