INSIGHT: High energy prices to hit India industries hard

Priya Jestin

01-Apr-2022

MUMBAI (ICIS)–India has hiked domestic prices of natural gas to bring them in line with elevated global energy markets, which, along with surging coal prices, will dampen industrial production in the giant developing economy.

Starting 1 April, the price of domestically produced natural gas for the next six months will be $6.10/MMBtus (million British thermal units), more than double the current level of $2.90/MMBtu, according to the Ministry of Petroleum and Natural Gas.

For natural gas from deepwater and difficult wells, the price was increased to $9.92/MMBtu from $6.13/MMBtu. This accounts for 30% of India’s total gas output.

This is the second consecutive hike in domestic gas prices, which had been raised by more than 60% in the previous six months (October 2021 to March 20220.

India revises its domestic gas prices twice in its fiscal year that starts April, based on a formula tied to global benchmarks.

Domestically produced gas meets half of the total gas demand in the country, with the remaining half being met by imports.

The recent price rise follows global gas prices which have been surging following Russia’s invasion of Ukraine on 24 February.

FERTILIZER SHORTAGE  WORSENS
While the price increases could reduce pressure on domestic gas producers such as Oil and Natural Gas Corp (ONGC), Oil India Ltd (OIL) and Reliance Industries Ltd, the development would have a detrimental impact on India’s fertiliser production.

High gas prices will boost the cost of fertilizer production, which is a subsidised industry in India. This meant a bigger subsidy burden for the government.

“Considering the current situation of Russia-Ukraine crisis, meeting fertilizer demand will remain a challenge. The international energy and commodity prices are likely to remain high at least in first half of 2022-23,” said S Nand, deputy director general of the Fertiliser Association of India (FAI).

The government plans to ensure that fertilisers are provided at subsidised rates to farmers, India’s minister for chemical and fertilizer Mansukh Mandaviya had said on 29 March.

The country is facing a shortage of fertilizers, which worsened amid the international sanctions imposed on its major supplier Russia.

COAL PRICES SURGING
For the wider industry in India, elevated prices of coal – which accounts for half of the country’s energy requirement – pose a serious operational problem.

Coal inventories at state government-owned utilities, which account for a third of all coal-fired plants, have slipped to the lowest level this year at 22% of mandated quantity, newswire agency Reuters reported.

In early March, the landed price of imported coal was around Indian rupees (Rs) 15,000/tonne ($197/tonne). High prices were deterring industries from importing the fossil fuel, and instead trying to procure coal locally.

Coal India’s electronic auctions of supply saw domestic coal prices tripling in March, after a 270% surge in February. Its mid-level grade coal fetched Rs13,400/tonne in a spot auction last month.

In the international market, coal prices hit $400/tonne in March, according to media reports.

High prices and short supply of coal could cause power outages as India’s demand typically peaks in the summer, from late March to late June.

This year, however, the country started experiencing a heat wave in early March, which increased electricity demand.

Supply disruptions due to the Russia-Ukraine conflict could raise the price of imported coal by nearly 55% in the June quarter, as per a report from ratings agency ICRA Ltd.

Coal inventories at state government-run power plants have fallen despite record production by state-owned producer Coal India Ltd (CIL).

The shortage is also due to a reduction in imports of coal in the fiscal year ending March 2022.

In the first 10 months of the 2021-22 fiscal year, India’s imports of non-coking coal fell by 23.3% year on year to 125.61m tonnes, official data showed.

POWER OUTAGES THREATEN INDUSTRIES
CIL has reduced coal supplies to the non-power sector, which includes aluminum and steel producers in a bid to increase supply to power companies.

The aluminum industry, which is a major consumer of coal, has been facing a severe coal shortage which could hamper production, the Aluminium Association of India (AAI) said in a letter to the government in early March.

Industries in the northern Punjab state have been facing power cuts amid low coal availability, while western Gujarat state has imposed a staggered weekly holiday due to a shortage of electricity.

Gujarat, one of India’s most industrialised states, has a large number of chemical and petrochemical producing units.

Starting April, certain industries in Gujarat have been asked to mandatorily implement a weekly holiday which is expected to ease the pressure on state power generators.

The order from the state-run Gujarat Urja Vikas Nigam Ltd (GUVNL) is restricted to industries with non-continuous processes.

The weekly holiday mandate could severely affect operations in industries which have just resumed functioning at full capacity following the COVID-19 pandemic, the Gujarat Chamber of Commerce and Industry said in a letter to the state government.

DIRECT COAL IMPORT OPTION MULLED
The textile processing industry in south Gujarat, which uses coal in the production process, has been affected by high prices and is trying to import coal directly from Indonesia to reduce costs.

Direct imports could help the industry save on coal prices which could help bring down production costs, said Jitendra Vakharia, president of the South Gujarat Textile Processors Association (SGTPA).

The industry hopes to negotiate directly with coal producers and attempt to get coal at cheaper rates compared with buying it at landed rates.

“We are exploring various ways to bring down the production costs since we are now paying double the price of coal when compared to the prices a year ago,” Vakharia added.

The prices of imported coal have doubled and processors fear a further price rise of nearly 50% in the next six months, Vakharia said.

Continued high prices of gas, coal, petroleum and petroleum products have also put a strain on the operations of micro, small and medium enterprises (MSME).

MSMEs are seeing a huge spike in raw material costs and a severe reduction in demand as an indirect impact of the Russia-Ukraine conflict as well as lockdowns in certain global markets due to a resurgence of the COVID-19 outbreaks.

“The crude price hike has caused a price rise in in the value chain which forms key raw materials for dyes, intermediates and the chemicals industry. Increase in prices of natural gas and coal have compressed margins further,” said Bhupendra Patel, regional chairman of industry body Chemical Export Promotion Council (Chemexcil).

MSME producers have been forced to defer new orders as they wait for raw material prices and fuel costs to stabilize, Patel added.

Insight article by Priya Jestin

($1 = Rs76.02)

Click here to read the Ukraine topic page, which examines the impact of the conflict on oil, gas, fertilizer and chemical markets.

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