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One of the key questions for the outlook for energy commodities is how quickly the current high prices translate into demand destruction.
While this will vary from country to country, India is perhaps something of the canary in the coal mine, as the South Asian giant tends to be more price sensitive than many other major commodity buyers in Asia, the world’s top importing region.
There are early signs that India’s demand for coal and liquefied natural gas (LNG) is struggling, and although crude oil demand looks solid in recent months, there are important caveats at work.
India is the world’s second-biggest importer of coal behind China, and imports in January are estimated by commodity consultants Kpler to have dropped to the lowest level since June 2020, when the country was battling the worst of the initial outbreak of the coronavirus pandemic.
India imported 12.4 million tonnes of all grades of coal in January, according to Kpler, down from 12.6 million in December and 16.1 million in November.
Part of the reason behind weakness in January would be lack of available cargoes from Indonesia, after Jakarta imposed a month-long ban on exports in order to ensure domestic supplies.
But sharply rising prices will also have curbed India’s enthusiasm for imports, with the benchmark thermal coal price, Australia’s Newcastle Index ARGMCCINDX=ARG jumping from a recent low of $153.10 a tonne in mid-November to a record high of $261.11 in the week to Jan. 28.
Australia has become India’s biggest coal supplier after China banned imports from the country amid a political dispute with Canberra, which in turn led Chinese buyers to snap up more Indonesian cargoes, depriving India of supplies from the Southeast Asian nation.
Looking specifically at thermal coal, India’s imports of the power generation fuel from Australia were just 764,679 tonnes in January, down from 1.1 million in December and 2.1 million in November.
LNG SLIDING
India’s LNG imports are also trending lower, with Kpler estimating January arrivals of 1.73 million tonnes, down from 1.91 million in December and 1.85 million in January 2021.
India tends to buy more of the super-chilled fuel on a spot basis or on short-term cargoes, and thus will have been exposed to a surge to record high prices late last year, when New York=-traded futures linked to the S&P Global Platts JKM benchmark JKMc1 reached $49.35 per million British thermal units (mmBtu).
The spot price has since slid to end at $24.71 per mmBtu on Monday, but it’s worth noting that this is still about three times what it was this time last year.
Natural gas in India is used as back-up power generation and for industrial applications such as making fertilisers, and at the current spot prices consumers will find it uneconomic to use the fuel.
The one area of strength in India’s energy imports would appear to be crude oil, with Kpler estimating January arrivals at 4.59 million barrels per day (bpd), and Refinitiv Oil Research even more bullish at 5.04 million bpd, which if confirmed would be a record month.
Imports are up from 4.65 million bpd in December and 4.48 million bpd in November, according to Refinitiv, as India’s economy recovers from pandemic lockdowns and refiners bring more capacity online.
However, gains in India’s crude imports aren’t necessarily all about the domestic market recovering, with Kpler data showing exports of the major refined fuels also picking up.
Shipments of diesel, gasoline, jet fuel and naphtha were 31.24 million barrels in January, according to Kpler.
While this was lower than December’s 34.94 million barrels, the last two months have been the strongest since May and June of last year.
India’s refiners are taking advantage of strong profit margins on refined fuels in Asia, with the margin for a typical Singapore refinery producing gasoil GOSGCKMc1, the building block of diesel and jet fuel, reaching $16.98 a barrel on Jan. 28, the highest since October 2019.
The profit on a barrel of gasoline GL92-SIN-CRK is off from recent highs just under $19 a barrel but at $11.49 on Monday it’s more than three times what it was at this time last year.
Lower product shipments from China have boosted margins for other Asian refiners, but if profits were to come under pressure from increased Chinese exports, then some of India’s current crude demand may be at risk.
It’s also worth noting India’s crude oil is generally bought six weeks to two months prior to delivery, so January’s imports are more reflective of the price two months ago, when Brent futures LCOc1 were around $68 a barrel, well below the $89.31 in early Asian trade on Tuesday.