Efforts by the Reserve Bank of India to keep inflation under control through monetary policy or rising interest rates could also make commodities expensive. And Coal India Limited (CIL) has to raise prices after four years.
The global energy crisis, rising coal prices and a clouding in the World Bank’s growth prospects have brought with them the typical challenges of increasing coal consumption around the world and have put pressure on India to postpone its emissions pledge.
Although the World Bank is predicting a severe recession in the West, it claims Indian growth will be faster. However, this has put pressure on India, like most of Europe, to increase coal consumption. Interestingly, Volkswagen is likely to make record profits from coal as energy prices soar to new heights amid a difficult situation between Russia and Ukraine, exacerbated by wars between Kyrgyzstan, Tajikistan and Azerbaijan and Armenia. This would affect India in a different way. As electricity generation costs increase, so would the billing be per unit.
Efforts by the Reserve Bank of India to keep inflation under control through monetary policy or rising interest rates could also make commodities expensive. And Coal India Limited (CIL) has to raise prices after four years. This could almost be a situation where Germany’s Volkswagen is expected to make massive trading gains from early hedges of natural gas, Bloomberg says, as Europe’s energy crisis has pushed up prices while also forcing the industry to look to alternative sources leaving sources.
The auto giant is selling 2.6 terawatt hours worth of natural gas contracts back to the German market to heat around 2,000 homes. The company started futuristic gas purchasing in 2020, when prices were around 30 euros per megawatt hour. Since the Russian invasion of Ukraine, this has grown to around 200 euros.
Volkswagen originally planned to use the natural gas to power the company’s two plants at the Wolfsburg plant. The deteriorating energy picture prompted the company to stick with coal and sell the gas, using profits from its gas hedges to offset costs. But the German market will pay higher costs and could face inflation as a result.
The uncertainties have led the OECD economic outlook to forecast real GDP losses of around 8% for the UK, Turkey and Argentina as high inflation becomes the norm. Global manufacturing is hitting new lows, unemployment is rising and weakening demand is likely to hit Indian exports. The World Bank says inflation will solidify as prices rise, and central banks need to be more aggressive in raising interest rates to dampen demand.
The energy war intensifies as Germany takes over three Russian-owned Rosneft subsidiaries, including three refineries. The move comes amid disruption to Russia’s gas flows to the Nord Stream pipeline. Rosneft Oil reported that profits rose 13 percent to about 432 billion rubles, about $7.2 billion, in the first half of 2022.
But that doesn’t solve Europe’s problem, and its dependence on coal imports from Australia, New Zealand, Indonesia and South Africa is increasing. Electricity generation from coal has increased by more than 20 percent since last year in France, Germany, Italy, the Netherlands, Spain and the UK combined.
In addition, climate change, supply logistic problems, geopolitical tensions, the slow recovery of the economy after the lockdown caused by COVID-19, the weak inter-ministerial coordination and the poor functioning of the electricity distribution companies have had a domino effect on the energy dynamics in India. According to the Union Department of Energy, the country faces a daily electricity deficit of 1 percent in the April-June period. According to Fitch Rating, the deficit is expected to widen as demand increases.
Unexpected demand for energy has once again brought the country’s coal shortages to the fore. Last October, coal shortages were blamed for low production at the CIL mines. That year, CIL production rose 23 percent, that of Singareni Collieries Company Ltd rose 34.2 percent and that of its own mines rose 40 percent, data from the Union Coal Ministry showed.
The surge in electricity demand has prompted a rise in energy prices on the Indian Stock Exchange, which have risen to Rs 12 per unit – the highest limit allowed by the Electricity Regulatory Commission. The fact that CIL has not increased its prices in the last four years remains a silver lining. It has attempted to raise prices to mitigate high input costs for diesel, explosive prices and other inputs. But with global pressures and rising international prices, it may not be possible to hold out.
This is a great hedge by the public sector company. It also has the problem of getting coal from foreign sources at a much higher price. The benefit of the CIL may not last long. The CIL hoped to be close to the H1 production target of 306 million tons by September. For FY23, the annual production target is 700 million tons and 900 million tons by 2025.
A higher coal price is becoming apparent. This would lead to an increase in the cost of electricity per unit, which could force the electricity regulator to raise the cap from Rs 12. In simple words, it would increase electricity generation cost, selling price and GST. Overall, this would lead to an increase in the burden on private and commercial consumers.
This would disrupt the consumer price basket. Also, the RBI’s effort to check inflation could only be a cracker. Inflation has risen to 7 percent in retail and 12 plus in wholesale. The power shock can exacerbate this and cause booming inflation. An agitated government is testing how long CIL can hold four-year-old prices. Under the pressure of the world, it would not be wise to do so for long.
Overall, this is bound to have a cascading effect on the prices of everything from food to fertilizer to every other commodity, a sharp trend seen around the world since 2021. The rise in fertilizer prices, along with other consequences of the war in Ukraine, has pushed up the prices of basic foodstuffs sharply. Since 2021, food prices have risen to the highest level since the United Nations Food and Agriculture Office started its index.
Prices are now significantly higher than in the past price spikes in 2008 and 2011 triggered by the turmoil of the global financial crisis. In the ten years since, prices have weakened significantly. However, these rose sharply in 2021 as supply chain issues, drought and other forces were at work. And the war in Ukraine has pushed food prices to a whole new level.
Runaway inflation also crushed wages not only in India but also in the largest OECD economies. In Great Britain alone, wages fell by 8 percent. Rising coal prices make India’s imports and domestic goods more expensive. The government is likely to face the heat and will need to find ways to bring it under control, which is again a difficult task.