Australian coal powering India has a long history and things point to a deepening of the relationship

IN 1799 the barque The Hunter was loaded with coal in Newcastle and dispatched to the British colonial province of Bengal. Tradition has it that shipment to the subcontinent was Australia's first export. Now more than 200 years later Australian coal sales to India are booming and the state-owned mining giant, Coal India, 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 and it is an essential resource for its power generation and steel industries.

India has significant coal reserves and is already one of the world's biggest coal producing countries, but local output is not keeping pace with 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 India's population does not have access to electricity and coal supplies will need to expand rapidly if government promises to provide power to every household are to be met.

''India is under real pressure to source more coal,'' says energy market analyst Armajit Singh.
''Fuel supply is the biggest hurdle to the development of the power sector in India.''

In response, Coal India, the world's biggest coal producer, has flagged an aggressive overseas acquisition strategy to try to secure coal supplies.

The company has its sights on assets in Australia as well as Indonesia, the United States and South Africa. Coal India chairman Partha Bhattacharya and India's Minister of State for Coal, Sriprakash Jaiswal, visited mining operations in NSW and Queensland last September.

India's rapid economic expansion is underpinning its coal demand. The Indian 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 Indian 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 steel-making 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 to India 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 make steel because its own reserves are high in ash content.

''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 region of NSW, says India's steel production is likely to treble over the next 10 years. This will guarantee strong demand for Australia's high quality coking coal that is essential for steel making.

''I believe strongly that Australian coking coal will be in very high demand,'' Mr Jagatramka told The Age.

India's coal-dependent electricity industry will also stoke demand for thermal coal.

Even though Indonesia's thermal coal mines have a comparative advantage over Australia's because they are nearer to India, Australia's reputation as a reliable supplier is attractive to Indian buyers. ''Indonesia, because of transportation is preferable,'' says Armajit Singh. ''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 Bhattacharya was quoted in the Indian media this year as saying that India would use at least 500 million tonnes of thermal coal for power from foreign-acquired mines 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 metallurgical 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.

It has just announced plans to spend $500 million expanding its operations over the next five years to scale up production. It is the only Indian company with coking coalmines in NSW.

Mr Jagatramka became a local hero in Wollongong last year when he came up with a $1 million bank guarantee that saved local basketball team the Illawarra Hawks from collapse.

The governments of both India and Australia are keen to facilitate more investment in their respective resources sectors and have set up an Australia-India Energy and Minerals Forum for that purpose. Its 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 Australian and India.

But experienced investors like Mr Jagatramka warn it will not be easy for Indian firms - public or private - to translate interest into acquisitions. India 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,'' says Mr Jagatramka. ''It's not like something you can go to Woolworths and buy off the shelf.'' .