India’s rush to avoid blackouts leaving iron firms without coal

Sponge iron producers in India are raising concern as fuel supply contracts won’t be renewed as the nation’s state-run coal miner continues to prioritise power plants in an effort to avoid blackouts.

Supplies from Coal India Ltd for some producers are scheduled to end from August, which means the companies will be forced to rely on vastly more expensive imported fuel, said Anil Nachrani, president of the Chhattisgarh Sponge Iron Manufacturers Association.

The producers in Chhattisgarh have appealed to the state miner to renew their pacts and are seeking talks with Coal Minister Pralhad Joshi, according to Nachrani.

Supply pacts for coal deliveries can be renewed if both parties agree, or instead awarded through an auction process that India’s government introduced in 2016 to boost transparency.

Coal India plans to follow the policy to auction supply contracts, it said in a response to requests for comment. The company did not specify when any new auctions will take place.

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The state miner is under pressure to boost stockpiles at power plants during the current monsoon season, which typically disrupts coal production and transport. Coal accounts for 70 per cent of India’s electricity production and efforts to prevent any disruptions are coming at the cost of industrial users.

Inventories at power plants rose to an average of 10 days supply on Sunday, well below required levels of more than three weeks, and about 18 per cent lower from a year earlier. India’s power ministry is pushing plants to import more fuel and Coal India this month issued a first-ever tender to procure material from overseas.

India’s domestic coal is subsidized and international prices have surged to a record, stoking concern among industrial consumers who face having cheaper supplies from local mines restricted.

Chhattisgarh is among India’s key production hubs. “We’re sitting right in the middle of coal mines,” said the sponge iron association’s Nachrani. “Asking us to import is like asking someone in Middle East to import oil.”

India experienced its worst coal crunch in years in 2021 as a prolonged monsoon season flooded mines and choked shipments. Higher electricity demand in recent months coupled with a global squeeze on fuel supply that’s lifting prices mean officials remain wary over the potential for electricity shortages.

“Coal India certainly doesn’t want a repeat of last year’s supply problems,” said Rupesh Sankhe, vice president at Elara Capital India Pvt. in Mumbai. “The message from the government is very clear -- prevent blackouts at any cost.”