As the supply crunch because of the conflict in West Asia sends global gas prices into a tailspin, coal is back on the boil.

The scarcity of natural gas is forcing many countries to scramble for coal as a substitute, sending prices to multi-year highs. Yet, as the world braces for extensive energy uncertainty, India stands in a position of strength.

India is leveraging its domestic reserves to insulate its power grid from international volatility. While energy-intensive industries face rising input costs, coal can act as a buffer that ensures households and the broader economy remain largely shielded from a 2022-style price explosion.

What’s Behind The Price Rise?

More than 70% of the electricity generated in India is dependent on burning coal. Further, multiple non-power industries such as cement, sponge, iron, fertilisers, also need coal to power their operations.

The all-India Production of thermal coal during 2024-25 was 981.053 million tonnes (Mt), and it imported another 186.05 Mt.

While 80% of India’s total coal needs are met from within the country, industry analysts believe that domestic sources may not be immune to price rise.

Driven by tightening portside supply and surging vessel freight costs, South African thermal coal prices at Indian ports recently hit a near three-year peak. Now trading at Rs 12,200 ($132) per tonne, the fuel has seen a 15% price spike since the onset of the West Asia conflict, according to data from market intelligence firm BigMint.

Coal prices across different geographies are up as a ripple effect of the stoppage of gas shipped from West Asia. Coal is the closest alternate thermal fuel in the absence of gas supplies.

Unlike India, many countries like Europe and Japan depend heavily on gas, instead of coal, to meet their power generation needs.

“If all Qatari LNG shipped to Asian countries in one year were used in the power sector, the impact would be close to 500 TWh, which is almost as large as South Korea’s entire power supply. Not all of this volume can be offset in the power sector by switching to other thermal fuels, as capacity is limited,” Pat See Khoo, Senior Principal Analyst, Global Seaborne Thermal Coal, S&P Global Energy, said in a note earlier this month.

Industrial Price Exposure

India’s coal consumption is best understood through the two distinct profiles — the regulated power sector and non-regulated industry. According to Satnam Singh of CRISIL Intelligence, nearly two-thirds of India’s thermal coal imports in FY25 were consumed by non-power industries like cement, sponge iron, and fertilisers.

While the power grid remains anchored by domestic supply, industrial players are heavily exposed to global price volatility, forced to absorb high-cost imports to maintain operations.

“Industries that depend on imported coal are therefore more exposed to global price volatility and may face higher input costs if coal prices remain elevated,” he said.

This means that the increase in global coal prices will likely have a larger impact on non-regulated industrial consumers compared with regulated power utilities.

In a recent analyst call with Motilal Oswal, the management of Hindalco Industries, a major aluminium producer in India, noted that the impact of the conflict is primarily confined to rising energy costs.

While coal linkages secure 75% of their energy needs, the remaining 25% sourced via e-auctions leaves the company exposed to domestic price spikes.

Lessons From Recent History

The 2022 Russia-Ukraine conflict serves as a stark reminder of how geopolitical volatility can upend the coal market. The war sent the global coal market into a tizzy.

Domestic e-auction premiums, the markup industries pay over Coal India’s base prices, surged to 329% in the second quarter of FY23. While these premiums have since stabilised between 55% and 65%, Axis Securities warned earlier this month that resurgent international prices could once again drive domestic auction costs higher.

Despite the current tension in West Asia, a repeat of the 2023 price explosion appears unlikely.

“Russia is the fourth largest coal producer with around 5% global share but the third largest exporter controlling about 13% of global exports, with major export destinations including China, India and South Korea,” Singh said.

While current gas disruptions may trigger fuel-switching in Europe, the structural integrity of the global coal supply remains more intact today than it did during the Russian supply shock.

Shift To Domestic Sourcing

As the West Asia war elevates the cost of imported coal, industries in India are likely to favour domestic coal. According to JM Financials, domestic coal becomes the more competitive option once international prices exceed $70/tonne. This shift is primarily governed by factors like factors landed cost (including freight) and calorific value.

BigMint executives told The Core that if prices remain elevated, “several consumers may shift towards domestic coal as a more cost-effective substitute. Some sponge iron producers also indicated the possibility of production curtailments if margins come under sustained pressure. Presently, near term outlook looks bullish.”

There are other factors — such as Indian summers and Indonesia’s changing coal policies — that are accelerating this trend.

India’s peak power demand during summers continues to hit record highs each year. This summer, coal-based units will need to do the heavy-lifting to compensate for the gas-based units (which contributed less than 5% to total demand annually) that were pressed into service last year.

Indonesia, India’s favoured coal supplier, is tightening exports.

“Portside prices for Indonesian thermal coal in India have also surged. Indonesia's coal production and exports fell in 2025 on lower demand from China and India. Indonesia is considering cutting coal output to around 600 million tonnes, tightening export availability. Middle East tensions are pushing up freight costs, lifting landed coal prices for Asian buyers,” the executives at BigMint noted, and they expect this demand to shift towards domestic sources.

Relative Security

Unlike natural gas, where India has an overwhelming 50% dependence on imports, coal is found aplenty in multiple Indian states. State-run Coal India holds an almost monopoly on these coal resources and contributes close to 75% of India’s total coal production.

In FY25, India imported only 20 per cent of its total thermal coal requirements, with Indonesia, South Africa, Australia and Russia as leading suppliers, thus ensuring coal supplies are not interrupted.

In a February-end release, Coal India said its producing subsidiaries are holding sizeable pithead coal stock to the tune of 115 mt and have a total on tap accessibility of coal is approximately 175.5 MT, including other sources.

Singh points out, “domestic dispatch to the non-regulated sector has also increased, improving coal availability for exposed sectors such as metals and sponge iron.” As a result, while e-auction premiums may raise input costs for industries, the impact may remain moderate.

Last week, India’s coal ministry also assured all is well in the coal department. India is ready for any unprecedented demand for coal, and both supply and production continue to be higher than consumption in FY2025-26, it said.