Some cement producers are shifting back to coal from petroleum coke (petcoke) to meet their fuel requirements following the Supreme Court’s recent ban on petcoke use.
Currently, the apex court has restricted use of petcoke in Rajasthan, Uttar Pradesh and Haryana to curb pollution in the National Capital Region. But chances of a ban across the country look bright.
Though extremely polluting, better quality and favourable cost compared to coal drove cement companies towards petcoke. In the past few years, cement producers increased the composition of petcoke compared to coal in their fuel mix. On an average, more than 70% of the fuel requirement of cement makers is met through petcoke. Petcoke usage in India posted a compound annual growth rate of 24% between fiscal years 2013 and 2017, according to broking firm JM Financial Institutional Securities Ltd.
Petcoke prices had fallen to as low as $40 per tonne in 2016, prompting the industry to move towards it. Also, a clean energy cess of Rs400 per tonne that is levied on coal further accelerated the shift to petcoke.
However, after August this year, petcoke prices began to harden when Hurricane Harvey hit the US. Operations of oil and gas refineries were disrupted by the hurricane that led to production shutdowns, causing a shortage of the fuel.
Many Indian cement makers rely on imported petcoke, the prices of which currently hover around $107 per tonne. But now, with that cost arbitrage reducing and with the apex court’s order, cement companies are not left with much choice but to switch back to coal.
Though companies have customized their plants, making them flexible to either use petcoke or substitute it with coal, there are challenges on the procurement front for domestic coal. “New linkages are not available for the cement industry. While theoretically, the cost/kilocalorie of linkage coal works out to be cheaper, the coal available is of a grade which can be used only for captive power plants and is not suitable for use in kilns," Edelweiss Securities Ltd said in a report.
Another option is to purchase coal via the e-auction route but there are constraints here as well. “Prices under e-auction are 30-40% higher compared to linkage coal. Also, availability of sufficient quantity is a challenge," added the broking firm. As far as imported coal is concerned, although the calorific value is high, at current prices, landed cost works out to be nearly 30% higher compared to petcoke, said analysts.
Whatever alternative cement companies opt for, power and fuel cost, which accounts for 25-30% of the total production cost, will only surge further. Meanwhile, a shift from petcoke to coal will mean an immediate increase in power and fuel cost of 15-25% per tonne for cement makers in Rajasthan, Uttar Pradesh and Haryana. The increase in cost will translate into an Ebitda (earnings before interest, tax, depreciation and amortization) impact of 20-30%. Simply put, the profitability of cement companies could erode severely. The only way to mitigate the impact on margins is by raising prices. Unfortunately, that too will be difficult since cement demand remains muted.
In fact, cement prices across the country continued to decline in November. All-India cement prices corrected by Rs5-6/bag (one bag equals 50kg) on a monthly basis, showed dealer channel checks by various brokerage firms.
To conclude, amid worries of a nationwide petcoke ban and the urgency to switch over to coal, cement companies are staring at earnings downgrades, unless they succeed in passing on the cost hikes through higher prices.