Cement makers and their changing fuel mix

A slew of problems relating to domestic coal deter cement firms from opting for it

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

When it comes to fuel mix, the choice that cement companies have to make is between domestic coal, international coal and imported petroleum coke (pet coke). Prices of both imported pet coke and coal have remained at elevated levels, but that of the domestic commodity are lower. But despite the steep price gap between imported coal and locally available fuel, cement companies have been relying more on the former, which has a bearing on their operating cost per tonne.

A slew of problems relating to domestic coal deter cement firms from opting for it. Coal India Ltd is the sole supplier of the fuel to various industries including cement in the country, but the fact that the miner has been missing production targets simply means that there is not enough coal available to meet the requirement of cement makers, which makes sourcing difficult, especially during the peak season of October-March. There are some cement firms that have access to coal linkages and purchase the commodity from auctions but even then it is inadequate, so to avoid the risk of unavailability, cement companies import coal despite the higher price, say analysts.

The second factor is quality. The gross calorific value (GCV) of imported coal is much higher than that of the locally available fuel. Higher GCV means less coal will be required per unit of production, which will save costs. “Say for instance, coal imported from Australia has 7,500-8,000 kilocalories and the Indian coal is around 3,500-3,800 kilocalories; higher GCV means a better grade of coal,” said Hemant Nahata, an analyst with IIFL Holdings Ltd.

There is also a geographic factor that comes into play here. “For south-based cement companies, their clinker units are located close to ports; hence, they prefer importing coal, though there may be an additional landed cost, but sourcing domestically means higher transportation cost, which would impact their operating cost/tonne. Thus, it may not be a very economically viable option for these cement companies to switch to domestic coal,” said Amey Joshi, associate director at India Ratings and Research Pvt. Ltd.

There is also a clean energy cess that is levied on usage of domestic coal that, coupled with the aforementioned factors, gives the international commodity an edge over the domestic one. But according to some analysts, this scenario too is likely to undergo a change going ahead, as cement firms would further increase the usage of imported pet coke over international coal. Though prices of pet coke have surged quite a bit in the past one year, it is a more efficient fuel compared to coal as it takes less time to burn and has a higher GCV. Among large cement companies, only ACC Ltd has higher usage of linkage coal compared to others; on the other hand, Shree Cement Ltd has completely switched to pet coke. Others are anticipated to follow suit.

However, one key drawback of pet coke is that it is a highly polluting fuel and as of now, there is limited clarity on whether there will be any restrictions on its usage by the government. Though cement companies have been following emission norms and have also incurred capital expenditure on a robust combustion process to minimize the adverse effect of pet coke on the environment, this headwind remains.

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