LAUNCESTON, Australia (Reuters) - India may import an additional 30 million tonnes of coal in the current fiscal year, and the good news for producers is that this is likely a conservative estimate.
The bad news is that India's extra demand may be offset by a similar decline in Chinese imports, thus leaving Asia's coal markets more or less in the same space where they are now.
The current situation is characterised by fairly robust seaborne volumes, but only because prices are low enough to keep buyers interested in China, the world's biggest importer of the fuel, used in power plants and steel-making.
The key question is whether Chinese import demand will hold up in the face of declining domestic prices and lower rates of growth in power generation.
The consensus view is not, with analysts polled by Reuters in February forecasting a 10 percent drop in 2013 imports to 210.8 million tonnes, down from a record 234.3 million tonnes last year.
In contrast, India's imports are likely to be at least 165 million tonnes in the fiscal year that started in April, which would be around 32 million tonnes more than in 2012-13.
That's the estimate of Pratik Prakashbapu Patil, the junior coal minister, who told parliament last month that total demand would be about 770 million tonnes and domestic supply around 604.55 million.
The tricky thing with India and coal forecasts is that they are seldom accurate, and this is likely to be the case again.
Total domestic coal output in the 2012-13 fiscal year that ended in March was 557.5 million tonnes, while the government target was 574 million, a 3 percent shortfall.
A similar shortfall in 2013-14 would amount to about 18 million tonnes, which would presumably have to be added to the planned import requirement of 165 million tonnes.
But the risks are that the shortfall is greater as Coal India, the world's largest miner of the fuel, may struggle to boost output as much as planned.
Coal production rose 4.6 percent in 2012-13 from the prior year, and a similar increase this fiscal year would take output to about 583 million tonnes - 21.5 million tonnes below the government's target.
But whether Coal India can raise production in 2013-14 by a similar percentage as it did in 2012-13 is questionable, given the rising capital costs and delays in getting new mine approvals.
Even if it could boost output by a similar percentage, such extra volumes may not be able to be transported by India's strained railways.
GRAPHIC on China coal trade, consumption: link.reuters.com/myp47t
That leaves imports as the only viable way to meet fuel demand, and it's likely that the 165 million-tonne forecast by the government is a minimum rather than a maximum.
But here too there are problems, with infrastructure strains once again an issue.
However, price looms as an even more important factor for imports, as even at current low prices domestic coal is about 50 percent cheaper.
The government has also rejected a move to price pool, whereby imports by Coal India would be lumped together with domestic supplies and the costs averaged.
Instead imports will instead be priced on a cost-plus basis, under which customers need to pay taxes, insurance and a 2 percent surcharge in addition to the import cost.
This means imports will continue to be a very expensive option compared to domestic supplies, and given India's regulated power prices, it's doubtful many power providers can turn a profit even using a relatively small percentage of overseas-sourced fuel in their generation mix.
Costs will provide a ceiling on India's imports as it's likely that generators would rather cut back output than make sustained losses.
It will take ongoing blackouts and political pressure to force changes to coal and electricity pricing, which may well happen, but is unlikely to happen quickly.
Nonetheless, the outlook for India's coal imports is bullish, while that for China is far from certain.
Despite the expectations that imports will decline for the first year in five this year, so far China has kept buying.
China's overseas coal purchases totalled 63.79 million tonnes in the first quarter of 2013, a gain of 27.3 percent over the same period last year.
If this rate is maintained, imports would total 255.2 million tonnes in 2013, which would be a gain of almost 9 percent on 2012.
In order for the consensus for a drop in 2013 to be met, coal imports will have to fade fairly dramatically over the rest of the year.
While this is possible given cheaper domestic supplies and lacklustre electricity generation growth, it may be too much to expect such a strong decline, especially if Asian coal prices remain depressed.
The spot price of coal at Australia's Newcastle port, a regional benchmark, dropped to $86.63 a tonne for the week to April 26, the lowest since November last year and 10 percent below its peak for 2013, reached in early February.
With no current drivers for higher prices, it's likely to drift around these levels as falling further would start to result in mine closures.
But at the current price, the risk is that China's coal imports may not drop as much as forecast, and that India's may climb by at least as much as the government expects.
Such a scenario is bullish for coal volumes, but bearish for prices, meaning only the lowest cost producers will prosper.
(Clyde Russell is a Reuters market analyst. The views expressed are his own)
(Editing by Joseph Radford)
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