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Senior Economist and Market Research Analyst @ Shipfix 25 years XP in finance, shipping and commodities
Temperatures in India have been soaring to unprecedented levels in recent days and weeks, putting lives, crops and energy supplies at risk. While the weather conditions have become increasingly extreme recently, the South Asian nation has faced elevated temperatures since March. Beyond the effects on human health, the high temperatures have been boosting the country’s demand for electricity as the use of air conditioning and refrigeration have risen sharply.
India’s already low coal inventories have taken a beating as the temperatures have been building. The Indian government recently reported that the coal stockpiles at the country’s utilities had fallen by fourteen per cent during April and were a third below target levels at the end of the month. However, the soaring temperatures are not solely to blame for the low inventory levels. According to data from the Indian government, domestic coal production has also fallen well short of targets and exacerbated the tight supply situation.
As a result, the Indian government has pushed for significant increases in thermal coal imports to avoid the already widespread blackouts becoming an even more substantial problem. The energy producers, both private and public, have been told that they need to import 38 million tonnes of coal before the end of October, out of which 50 per cent should arrive before the end of June. If the new initiative is fully implemented, it will result in Indian annual coal imports reaching the highest levels since at least 2017. In addition, Indian authorities have invoked a rarely used provision in the country’s laws to order power plants that use imported coal to operate at full capacity. The latter initiative is also likely to contribute to rising Indian imports of the dirtiest of fossil fuels. The dwindling coal inventories have also led to the unusual step of importing expensive LNG by the country’s ordinarily cost-conscious power producers.
It is not only the power suppliers that are facing shortages of coal, as India’s producers of sponge iron also have to deal with tight supplies. With current stockpiles at only sixty per cent of normal levels in parts of India, producers have been forced to cut back on production while waiting for more supplies to arrive from overseas. According to the country’s Sponge Iron Manufacturers Association, the industry is looking to import 35 million tonnes of coal during the current fiscal year, around thirty per cent more than during the previous one. Hence, the high global coal prices will inject additional inflationary pressures into the South Asian economy.
India’s seaborne imports of coal have been trending lower since April last year, with recent monthly volumes accounting for only around a quarter of what was observed a year ago. However, the increasing demand for electricity, and by extension coal, have seen cargo order volumes rise during April after reaching the lowest weekly reading for over three years in the middle of March. The dip last week may be explained by a public holiday. The latest initiatives by the Indian authorities are also likely to contribute to a continued recovery in seaborne coal volumes discharged in Indian ports.
The scorching heat in India is also having an impact on the country’s farming sector. Most notably, there are increasing concerns over the state of the current wheat crop in the country. While India is a major producer of the grain, the country has not been a significant contributor to the global wheat trade in the past. The farmers in the South Asian nation have typically been guaranteed high domestic prices to safeguard supplies for the country’s population. However, as the wheat prices have been soaring in the wake of the Russian invasion of Ukraine, exporting has become a more attractive proposition for the growers. In addition, after many years of sizeable harvests, inventory levels have been rising, providing Indian authorities with the confidence to grant extensive export licences. The timing of India’s entry onto the global market proved to be beneficial as it eased some of the concerns over the outlook for wheat supplies and prices. However, the newfound supplies are far from sufficient to offset the volumes lost due to the war.
The high temperatures have dashed previous expectations of yet another bumper wheat crop. The Indian wheat output in the current year looks set to drop after five consecutive years of record harvests. Prior to the heatwave, government officials saw an opportunity to export twelve million tonnes during the 2022/23 fiscal year. However, those projections are now likely to be on course for a significant downward revision. Despite the dimming outlook for Indian wheat production, the government has suggested that there is no need for any export curbs at this stage.
As Shipfix has previously reported, cargo order volumes soared to previously unseen levels in the wake of the announcement that India would be increasing its exports, and the development proved to be not an isolated event. Weekly volumes have remained elevated in a historical context ever since, as traditional buyers of wheat from the Black Sea region in Egypt, Turkey, and Europe have eyed Indian supplies for substitution.
The Indian heatwave looks likely to contribute to higher dry bulk tonnage demand as the country struggles to rebuild its coal stockpiles, with seaborne imports being vital to the process. On the other hand, the exceedingly hot conditions could temper the country’s lofty ambitions for its wheat exports in the long run and offset some of the effects of the rising coal imports.