Ads by Google The Clean Coal Reality Coal Will Remain a Major Energy Source. Two Stocks will Dominate.
www.greenchipstocks.com
Australia is poised to tap into India's massive energy needs, writes Matt Wade in New Delhi.
In 1799 a barque named The Hunter was loaded with coal in Newcastle and dispatched to the British colonial province of Bengal. Legend has it that that shipment to the subcontinent was Australia's first ever export.
Now, more than 200 years later, Australian coal sales to India are booming and the state-owned mining giant, Coal India Limited, is hunting for Australian coal investments to help avert a worsening energy crunch in one of the world's fastest-growing economies.
More than half of India's energy demands are met by coal. It is an essential resource for its power generation and steel industries.
It has significant coal reserves, and is already one of the world's biggest coal-producing countries, but local output is not keeping pace with runaway demand. The country is expected to have a coal shortfall of more than 80 million tonnes next year and the supply gap is set to widen rapidly.
This threatens to exacerbate India's already chronic shortage of electric power. Almost half of its population does not have access to electricity and coal supplies will need to expand rapidly if the government's promises to provide current to every household are met.
"India is under real pressure to source more coal," says energy market analyst Armajeet Singh. "Fuel supply is the biggest hurdle to the development of the power sector in India."
In response Coal India Limited, the world's biggest coal producer, has flagged an aggressive overseas acquisition strategy in a bid to secure coal supplies for India's fuel-starved power and steel industries.
The company has its sights on assets in Australia as well as Indonesia, the US and South Africa. The chairman of Coal India, Partha Bhattacharyya, and India's Minister of State for Coal, Sriprakash Jaiswal, visited mining operations in NSW and Queensland in September.
India's rapid economic expansion is underpinning its coal demand. Its economy was not seriously affected by the global financial crisis and growth is tipped to accelerate above 8 per cent this year.
The Reserve Bank of Australia drew attention to the growing importance of the India economy to Australia in its most recent statement on monetary policy and highlighted the rapid growth in coal exports to India.
"Coal exports have also risen strongly over the past decade and accounted for over 40 per cent of Australia's total goods exports to India in 2008-09," the bank's February statement said.
"Coal exports are likely to continue to grow over the next few years, as significant planned expansions in India's steelmaking capacity come online."
The value of Australian coal exports to India surged to a record $6.7 billion last financial year.
Most Australian coal exported there is used in its steel industry, which has doubled production from 30 million tonnes to 60 million tonnes in the past five years.
India imports about 90 per cent of the coking coal needed to manufacture steel because its own reserves are high in ash content, making it inappropriate for steel production.
"We are very, very much dependent on external sources for metallurgical coal [needed for steel production]," says Coal India's Phalguni Guha.
Indian businessman Arun Kumar Jagatramka, chairman of India's Gujarat NRE Coking Coal, which owns two coalmines in the Illawarra, says his country's steel production is likely to treble over the next 10 years.
"I believe strongly that Australian coking coal will be in very high demand," Mr Jagatramka told BusinessDay.
India's coal-dependent electricity industry will also stoke demand for thermal coal.
Even though Indonesia's thermal coalmines have a comparative advantage over Australia's because they are closer to India, Australia's reputation as a reliable supplier is attractive to Indian buyers.
"Indonesia, because of transportation, is preferable," Mr Singh says.
"But they only have limited quantity. There is huge scope in Australia because it has huge resources and it is a very reliable source."
The Australian Bureau of Agricultural and Resource Economics has forecast India's imports of thermal coal to double between 2009 and 2015.
Mr Bhattacharyya was quoted in the Indian media this year saying that the country would use at least 500 million tonnes of thermal coal for power from foreign-acquired mines plants over the next 10 years.
So far, India's interest in Australian coal has not translated into a large number of investments.
Gujurat NRE, the largest independent producer of met coke in India, is one exception.
It spent more than $270 million to revive two mothballed collieries after buying them in late 2004 and April 2007 respectively. The firm has just announced plans to spend $500 million expanding its operations over the next five years to increase production.
It is the only Indian company with coking coalmines in NSW. Mr Jagatramka became a hero in Wollongong last year when he came up with a million-dollar bank guarantee that saved local basketball team the Wollongong Hawks from collapse.
The governments of both India and Australia are keen to increase investment in their respective resources sectors and have set up an Australia-India Energy and Minerals Forum for that purpose. The forum's next meeting will be in Perth next month.
Canberra views energy and resources as one of the drivers of the rapidly expanding bilateral relationship between both countries.
But experienced investors such as Mr Jagatramka warn it will not be easy for Indian firms - public or private - to translate interest into big acquisitions. It faces stiff competition from other emerging economies, especially China, in its rush to secure its energy future.
"There are not many lucrative opportunities for investment in the [Australian coal] sector and that remains a major bottleneck," Mr Jagatramka says. "It's not like something you can go to Woolworths and buy off the shelf."
CWK Price at posting:
53.0¢ Sentiment: Hold Disclosure: Held
