Opinion

Energy war singes economy

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 Limited (CIL) is bound to raise prices after four years.

The global energy crisis, soaring coal prices, and a darkening World Bank outlook for growth has posed typical challenges of increasing coal use across, pressurising India to delay its emission promises.
Though the WB predicts severe recession in the West, it avers that Indian growth would be faster. However, that has pressurised 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 a new height amid a troubled Russia-Ukraine situation being accentuated by Kyrgyzstan-Tajikistan and Azerbaijan-Armenia wars. 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 Limited (CIL) is bound to raise prices after four years. This may almost be a situation like 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 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 OECD Economic Outlook to project real GDP loss by about eight per cent in the UK, Turkey and Argentina as severe inflation becomes the norm. Global manufacturing is touching new lows, joblessness grows and the demand slowdown is likely to hit Indian exports. The WB says that as prices soar, inflation becomes entrenched and central banks will have to raise rates more assertively to slow demand.
The energy war exacerbates as Germany takes over three Russia-owned Rosneft subsidiaries, including three refineries. The move comes amid stoppage of gas flows by Russia to Nord Stream pipeline. Rosneft Oil reported that profits climbed 13 per cent in the first half of 2022 to about 432 billion rubles, about $7.2 billion.

But this does not solve Europe’s 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 per cent in France, Germany, Italy, Netherlands, Spain and the UK together since last year.

In addition, climate change, supply logistic 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 per cent, according to Union Power Ministry, in 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 productions at CIL mines. This year, the CIL production increased by 23 per cent, from Singareni Collieries Company Ltd 34.2 per cent and from captive mines by 40 per cent, data from the Union Ministry of Coal revealed.

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 past 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 hedging by the public sector company. It is also having the problem of procuring coal from foreign sources at a much higher rate. The advantage of the CIL 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 tonnes and 900 million tonnes by 2025.

A higher coal price looms large. It would cause 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 to rise.

This would disturb the consumer price basket. The effort at checking inflation by RBI too may be mere a cropper. Retail inflation has surged to 7 per cent and wholesale 12 plus. The power shock can worsen this causing a booming inflation. A worked up government is looking at how long CIL can hold on to the four-year old prices. Under world pressure it would not be prudent to do so for long.

In all it is bound to have a cascading effect on prices from food, fertilizer to every other commodity, a sharp trend observed since 2021 across the globe. The liftoff in fertilizer 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 these 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 per cent. The rising coal prices make India’s imports and domestic goods expensive. The government is likely to face the heat and needs to look for ways to put it under check, again a difficult task.

 

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Shivaji Sarkar

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