Energy war likely to singe the economy

The WB says that as prices soar and inflation becomes entrenched, central banks will have to raise rates more assertively to slow demand

Shivaji SarkarUpdated: Tuesday, September 20, 2022, 08:12 PM IST
Coal India is bound to raise coal prices after four years | Representative Pic

The global energy crisis, soaring coal prices, and a darkening World Bank outlook for growth has posed the challenge of increasing coal use, pressurising India to delay its emission promises.

Though the World Bank predicts severe recession in the West it avers that Indian growth would be faster. But that has pressured India, like most of Europe, to increase coal usage. Interestingly enough, Volkswagen is likely to have record profits from coal as energy prices zoom to new heights amid a troubled Russia-Ukraine situation, being accentuated by the Kyrgyzstan-Tajikistan and Azerbaijan-Armenia conflicts. This would impact India in a different way. As power generation cost increases so would be per unit billing.

The Reserve Bank of India's efforts to keep inflation under check through monetary policy or rising interest rates may also turn commodities expensive. And Coal India is bound to raise coal prices after four years.

It may be almost like a situation where the German Volkswagen is expected to rake in massive trading profits from early hedges on natural gas, says Bloomberg, as Europe's energy crisis has sent prices soaring while also forcing industry to rely on alternative sources.

The auto giant is selling 2.6 terawatt-hours worth of natural gas contracts back into the German market, for heating up about 2 lakh homes. The company began futuristic purchase of gas in 2020, when prices were about 30 euros per megawatt hour. This has since zoomed to about 200 euros since the Russian invasion of Ukraine.

Volkswagen originally planned to use the natural gas to power the company's two facilities in the Wolfsburg plant. The worsening energy picture made it stick to coal and sell the gas, and use the profits from its gas hedges to offset costs. But the German market will pay higher costs and may face resultant inflation.

The uncertainties have caused the OECD Economic Outlook to project real GDP loss by about 8% in the UK, Turkey and Argentina as severe inflation becomes the norm. World manufacturing is touching new lows, joblessness is growing, and the demand slowdown is likely to hit Indian exports. The WB says that as prices soar and inflation becomes entrenched, central banks will have to raise rates more assertively to slow demand.

The energy war is exacerbated as Germany takes over three Russia-owned Rosneft subsidiaries, including three refineries. The move comes amid a stoppage of gas flows by Russia to the Nord Stream pipeline. Rosneft Oil reported that profits climbed 13% in the first half of 2022 to about 432 billion rubles, about $ 7.2 billion.

But this does not solve the European problem, and its dependence on coal imports from Australia, New Zealand, Indonesia and South Africa increases. Power generation using coal has shot up over 20% in France, Germany, Italy, Netherlands, Spain and the UK together since last year.

Climate change, supply logistics issues, geopolitical tensions, slow revival of the economy after the COVID-19-induced lockdown, weak inter-ministerial coordination and poor functioning of the power distribution companies have had a domino effect on the energy dynamics in India. The country is facing a daily power deficit of 1%, according to the Union Power Ministry, in the April-June period. The deficit is likely to widen, says Fitch Rating, as demand is swelling

The unexpected demand for energy has once again brought the country’s coal shortage to the forefront. Last October, the coal shortage was blamed for low production at CIL mines. This year, the CIL production increased by 23%, from Singareni Collieries Company Ltd 34.2% and from captive mines by 40%, data from the Union Ministry of Coal showed.

The increase in power demand has led to a surge in prices of energy at the Indian exchange, soaring to Rs 12 per unit — the highest limit allowed by the electricity regulatory commission. The CIL not hiking its prices in the last four years remains a silver lining. It has been seeking to hike prices to mitigate high input costs of diesel, explosive prices and other inputs. But amid global pressure and international prices increasing, it may not be possible to hold on.

This is a great hedge by the public sector company. It also has the problem of procuring coal from foreign sources at a much higher rate. CIL's advantage may not last for long. The CIL was hopeful of reaching close to the H1 production target of 306 million tonnes by September. For FY23, the annual production target is 700 million tonne and 900 million tonnes by 2025.

A higher coal price looms large. It would cause an increase of power per unit cost and that may force the power regulator to raise the Rs 12 cap. In simple words, it would raise power production cost, selling price and higher GST. Overall it would mean that the burden on domestic and industrial consumers would rise.

This would disturb the consumer price basket. RBI's efforts to check inflation too may come a cropper. Retail inflation has surged to 7% and wholesale 12-plus. The power shock can worsen this, causing booming inflation. A worked up government is looking at how long CIL can hold on to the four-year old prices. Under global pressure it would not be prudent to hold on to it for long.

It is bound to have a cascading effect on prices from food and fertiliser to every other commodity, a sharp trend observed since 2021 across the globe.

The liftoff in fertiliser prices, along with other fallout from the war in Ukraine, has pushed prices for basic foods much higher. Since 2021, food prices have risen to their highest level since the United Nations’ Food & Agriculture Office began its index. Prices today are considerably higher than in past surges in 2008 and 2011, which were precipitated by the turmoil of the global financial crisis. In the decade since, prices have moderated considerably. But they turned sharply higher in 2021, with supply chain snags, drought and other forces at work. And the war in Ukraine has lifted food prices to an entirely new level.

Rampant inflation also flatlined wages not only in India but also in the biggest OECD economies. In the UK alone, wages fell by 8%. The rising coal prices make India’s imports and domestic goods expensive. The government is likely to face the heat and look for ways to keep it in check again, a difficult task.

Shivaji Sarkar is a veteran journalist, an observer of the socio-politico economy, and a media academician

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