Australia is focused on growing the Indian thermal coal market for its exports, despite warnings that the demand profile in India is uncertain.

Australia’s resources minister Matthew Canavan flew into Calcutta today to promote sales of Australian thermal coal into India armed with a report from the government’s commodity forecaster the Office of the Chief Economist (OCE) outlining the opportunities available to both sides.

Australia’s pivot to India is partially because of the perceived upside available as the large population moves to increased connectivity to the electricity grid, as well as growing concern in Canberra about future thermal coal trade with China.

Canavan talked up the outlook for Australian coal into India, stating that there is an opportunity to export an additional 37mn t/yr into the south Asian nation if Australia can increase its import market share to 25pc of the total, which is equivalent to Australia’s share of Chinese thermal coal imports.

“That is the equivalent of three or four new Adani Carmichael-sized coal mines. If this investment occurred in the Galilee Basin, it would open up a new, sustainably-sized coal basin in Queensland,” he said.

The OCE’s Coal in India 2019 report warns, however, that the Indian market for thermal coal imports is finely balanced, with around 80pc of the country’s requirements currently covered by domestic supply. The OCE expects Indian imports of thermal coal to remain strong over the short term but warned that increased renewable use and a rapid decline in barriers to higher domestic coal production were significant risks to imports over the medium to short term.

Australian thermal coal exports to India peaked at 6.66mn t in 2014, before falling to 3.14mn t in 2017 and rebounding to 4.19mn t last year, according to data from the Australian Bureau of Statistics. Australia exported 1.58mn t in the first six months of this year, or an annualised rate of 3.16mn t/yr. By comparison, Australia exported 49.79mn t to China in 2018 and 24.01mn t in the first six months of 2019. Japan, South Korea, Taiwan, Malaysia, Vietnam and Thailand have all taken more coal from Australia than India in the first six months of this year.

Indian firm Adani was granted approval to begin work on its 27.5mn t/yr Carmichael coal mine in the Galilee basin in June, although this was not included in the OCE’s long-term Australian supply outlook that extends out until 2024. This is a highly contentious project because it requires significant infrastructure to open the inland Galilee basin and because it produces lower-quality, higher-ash coals than Australia usually exports.

Challenges

Most Australian coal typically imported by India has a calorific value (CV) of around NAR 5,100-5,500 kcal/kg, although occasional cargoes can be absorbed with a CV below this level. But Australia’s hopes of significantly increasing exports to India may be hampered by the fact that it competes with South African NAR 5,500 kcal/kg coal, which is much closer with a freight advantage of around $2.50-$3/t to east coast India compared with a similar-sized vessel from Newcastle, Australia.

Many Indian power producers struggle to handle the unusually high ash content in Australian NAR 5,100-5,500 kcal/kg coal. The Argus fob Newcastle NAR 5,500 kcal/kg coal price assessment sets 24pc as the maximum ash content that can be accepted in this index. Yet some Indian power producers now prefer an ash content of 9-10pc. The Australian high-ash coal also has qualities that make it less attractive than South African coal to the sponge industry in India.

But Indian cement makers are typically less sensitive to high ash and sulphur and sometimes buy even higher ash coal from Australia of up to 27pc ash, which they obtain at a significant discount to the Argus fob Newcastle NAR 5,500 kcal/kg index. At the same time these cargoes face fierce competition even in the Indian cement sector, which can use US coal from Northern Appalachia and petroleum coke, which both tend to be cheaper than Australian coal on a per kcal/kg basis.

Furthermore, India is not a big buyer of higher-priced high-CV, lower-ash thermal coal from Australia. As a result, there is also very limited potential for imports of the NAR 6,000 kcal/kg grade, traders said.

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