The uncertainty over Russia's invasion of Ukraine is making domestic buyers rush to buy coal sending its prices higher.
Last week, coal prices soared to new highs as the market anticipated a supply shortage as a result of Russia's sanctions and the "self-sanctioning" of Russian energy buyers.
Russia accounts for around 20 percent of the global thermal coal exports.
Even though India doesn't import coal from Russia, the surge in its prices globally will have a cascading effect on the price discovery front in those origins where it imports from. As per reports, India ships in high-grade coal from Indonesia, Australia, and South Africa.
Bloomberg reported on Monday that some buyers in India had spent 340 percent more than baseline prices in local auctions so far in March, citing persons familiar with the situation. The seller was Coal India Ltd, the largest coal producer in the country and the world.
Coal India, the world's largest producer of fuel, sells about 15% to 20% of its output through an online auction system in which consumers make bids above a predetermined minimum price. Rates paid are typically much higher than those found in long-term contracts, which account for the vast majority of sales.
Thermal coal loaded at Australia's Newcastle port, a benchmark for seaborne supply in Asia, hit a new high last week as buyers avoided Russian shipments and sought alternatives to pricey natural gas. This tightens a global market that was already strained by disruptions in other exporter countries.
Even with large premiums, locally produced coal is still far less expensive than coal imported from Australia or Indonesia. In March 11 auctions, Coal India offered coal with a heat value of 6,000 kilocalories per kilogramme for about 11,700 rupees ($153.70) per tonne. That’s less than half the price of a similar variety of coal at Newcastle on the same day.
Higher international coal prices pose no threat to the power sector, but the non-power sector is expected to bear the brunt of the impact.
Coal India is also seeking to make the first major price increase since 2018 to long-term contracts, arguing that a hike is necessary to handle spiralling costs. India relies on coal to generate about 70% of its electricity.
An average of 23 analysts polled by MintGenie have a ‘buy’ call on Coal India.