India's coal production rose in the first half of the year from a year earlier, adding to the domestic surplus and dampening demand for imported coal.

Delhi's push to boost domestic coal output helped the country surpass 1bn t in output last year and lifted overall inventories. The momentum has largely continued this year, but a slowdown in utility coal demand has left India with abundant domestic supply, prompting authorities to review policies and encourage domestic coal use. High stockpiles and weak demand could be beginning to affect growth plans of local producers. The domestic surplus is also curtailing demand for imported cargoes, exacerbating pressure on the oversupplied seaborne market.

India's coal production rose by 1pc to 568.57mn t in January-June from a year earlier, according to data from India's coal ministry. But output in June fell by 7pc on the year to 78.98mn t, marking the first drop in 10 months mainly because of seasonal rain-related disruptions and operational adjustments by coal producers in response to weak demand. State-owned Coal India (CIL) accounted for about three-quarters of the output during the first half of the year, while the remainder came from state-owned Singareni Collieries (SCCL), provincial government mining firms, and captive and commercial coal blocks.

India's thermal coal imports in January-June fell by 3.6pc from a year earlier to 85.23mn t, data from analytics firm Kpler show. But the imports might haveedged higher by 2.4pc on the year to 13.92mn t in June, according to Kpler estimates, when domestic production slipped. But broadly weak international prices could not spur seaborne coal demand from India, the world's second-largest thermal coal importer. Argus assessed the GAR 4,200 kcal/kg coal market for geared Supramaxes at $40.26/t fob Kalimantan on 18 July, down by 23pc from a year earlier.

Demand from utilities, the key coal consumer in India, has weakened, with coal-fired generation, which accounts for the bulk of India's power output, declining in four out of six months this year so far, leaving plants with record inventories. Indian power plants held a combined 61.66mn t of coal as of 30 June, up by 32pc on the year and by 2pc on the month, data from the Central Electricity Authority (CEA) show. Overall domestic coal availability was around 200mn t as of 30 June, when factoring in stocks with coal producers, including CIL and SCCL, utilities, at ports and in transit, according to analysis of government data. The aggregate stocks can meet utility demand for at least 68 days.

India's coal-fired generation dropped for the third straight month in June to 103.29TWh, down by about 9pc on the year, according to the CEA. Large-scale hydropower generation rose by 17pc on the year to 16.59TWh, while India's overall generation declined by 6.4pc to 130.88TWh, the CEA data show, in line with early arrival of the monsoon and weak industrial activity.

The subdued demand and high inventories have led to shifts in government policy. Delhi did not renew its directive to imported coal-fired plants to keep generation levels high after the order expired on 30 June. It also revised coal supply rules, giving greater access to imported coal-fired plants and independent power producers to domestic coal.

The global coal market is closely watching the weak demand and domestic supply situation in India as well as China — the world's top two coal importers — and Indonesian suppliers are increasingly looking to rationalise operations in response, a coal producer and traders said.

Indonesia's coal output fell by about 9pc to 369mn t in January-June from a year earlier, according to provisional data from the country's energy ministry.

Demand recovery

Indian demand for imported coal is expected to recover after the monsoon season. Industrial and residential power demand typically rises in the post-monsoon months.

Authorities expect demand to pick up and possibly hit a peak of 277GW in the coming months, up from 209GW in late June. The monsoon arrived earlier than anticipated and could retreat from most regions by the end by next month, lifting power demand, and supporting demand for domestic as well as imported cargoes, a Jakarta-based trader said. The Indian demand recovery could coincide with rebound in Chinese demand for winter restocking, supporting sentiment in the seaborne market, the trader added.

India is relying heavily on coal to meet growing power demand, with plans to install an additional 80GW of new thermal projects in coming years with a focus on energy security, according to consultancy Rystad Energy.

Coal-fired power accounted for 79pc of generation by the end of June, while coal-fired capacity was at 215GW, accounting for about 44pc of overall installed capacity. Renewable power capacity has increased to 185GW as of 30 June, up by 25pc on the year. India's non-fossil fuel-based generation capacity, including large hydropower projects, reached 234GW, accounting for 48pc of India's overall generation capacity.

But coal will likely continue to account for the bulk of generation in the coming years to power India's economy. Demand for coal-fired reliable baseload electricity sources could also find support from the growth of the electric vehicle industry and data centers, supporting overall coal demand, another trader said.

By Saurabh Chaturvedi