Want to Invest in India? Keep One Eye on its Coal Production

Want to Invest in India? Keep One Eye on its Coal Production

by David Fessler, Investment U Senior Analyst
Wednesday, October 26, 2011

I’ve said it over and over – economic growth requires a cheap source of home-grown energy.

It doesn’t matter what country we’re talking about. Without cheap energy, economic growth stagnates, plain and simple. If energy is expensive, transportation gets expensive, and the cost of goods gets expensive. Consumer spending slows, and economic growth stagnates.

India may be facing just such a problem… To continue its economic growth, which is running at about nine percent annually, India needs to add 75,000 MW of power generation over the next five years.

India burns coal to generate about half of its electricity. In 2011, it’ll import about 54 million tons to generate power.

Nearly 85 percent of new generation over the next five years is targeted to come from coal-burning plants. That translates into a 400-percent rise in coal imports – to about 213 million tons by 2016 or 2017.

This is particularly ironic in that India is sitting on 10 percent of the world’s coal reserves, or approximately 267 billion tons.

How can a country with such vast reserves of coal have to increase its imports four times in as many years? The short and simple answer is bad policy decisions on the part of the government.

Coal India, a state-run monster, is the country’s main coal producer. Its 2010 production was a stagnant 431 tons. It’s suffered from increased environmental hurdles, difficulty in obtaining land and lack of adequate investment by India’s central government.

India’s Growing Supply Gap

The widening power generation gap is particularly acute in India. Its rising middle class is demanding more shopping malls and air-conditioned homes and offices. The peak-power deficit (the amount of power needed versus what can be supplied) grew to 12 percent last year.

It’s going to get worse, and that could have a stalling effect on the country’s economic growth. Remember what happened here when oil prices shot through the roof?

India’s demand for coal has made Coal India the second-most valuable company in the country. Its 2010 IPO raised a record $3.5 billion. But even with that kind of investment, it will struggle to meet even a fraction of India’s additional demand for coal.

A report published by India’s Central Electric Authority, remarked “The Ministry of Coal/Coal India need to be impressed upon to formulate a contingency plan to meet the demand of the power sector.”

The reality is that there is no contingency plan. Even if the government came up with one, nothing would change short term.

The bottom line is that India will be importing four times the amount of coal it does now in five years. Countries and companies who export coal to India can sell all they can produce.

The demand from both India and China will keep a floor under coal prices, and the stocks of companies that produce and export it. Consider any one of the large coal exporters as a great place to start investing in the coal sector.

Good investing,

David Fessler

Article by Investment U