Home / Markets / Mark To Market /  Is the ‘waste heat recovery system’ a saviour for cement companies?

Cement companies continue to make new investments in waste heat recovery systems (WHRS) installations. The sector’s overall cost has spiked in recent quarters mainly because of high fuel costs. Against this backdrop, WHRS is a saviour. It traps the enormous heat generated during manufacturing and generates electricity, which can be used as an additional source of power. Thus, it helps reduce energy costs.

If about 10% of power is consumed from WHRS, it could help cement companies save Rs50 per tonne, according to an analysis by Yes Securities. Analysts estimate that the average power generation cost from WHRS is less than Re1 per unit compared to Rs5 per unit from the grid. Power and fuel account for 25-30% of the sector’s total operating costs.

Concrete steps
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Concrete steps

The increased thrust on green energy also takes cement companies closer to their goal of zero carbon emissions. Pan-India focused Ultratech Cement aims to meet 100% of its electricity requirement through renewable sources by 2050 and scale up its green energy mix to 34% of its total power need by 2024. Ultratech has 436 megawatt (MW) of green energy capacity, including 167MW of WHRS installed capacity and 269MW of contracted renewable energy. Dalmia Bharat and JK Lakshmi Cement are among others who have laid out plans to add WHRS and solar power plant capacity.

“Increased investment in WHRS is definitely a step in the right direction to do well on the ESG (environment, social and governance) scorecard," said Amish Shah, head of India research, BofA Securities. “With most companies having 5-15% share of energy from renewable resources and the visibility through already allocated funds and ongoing capex, there seems to be good headroom for them to boost their ESG score in a substantive way," Shah said.

The cement sector has a massive carbon footprint. Companies are becoming conscious of their responsibility towards the environment. As such, WHRS seems effective as it reduces carbon dioxide emissions by limiting the use of fossil fuel. This bodes well for the cement sector’s ESG outlook, but achieving these goals is easier said than done.

Lokesh Garg, an analyst at Credit Suisse Securities (India), explained that established technologies such as renewables and WHRS are not enough to decarbonize the cement sector entirely and would only help cut emissions by 15-20%. “Half of the total emissions related to concrete are generated in limestone calcination and there is no alternative to that process. Further reductions in cement/concrete emissions to reach net-zero concrete will rely on technologies yet unproven/uneconomical at an industrial scale," Garg said.

However, despite a high carbon footprint, investors are not totally shunning the sector. Shah said incremental and sustainable cost savings by using green energy can raise the prospects of re-rating in the sector. Cement companies have been struggling to contain their operating margin erosion, which has led to earnings downgrades, thus souring investor sentiment towards the sector.

That said, these efforts by cement companies won’t translate into better valuations immediately. The ESG concept is still at a nascent stage in India. So, there are challenges in evaluating companies based on ESG.

“The sector is flying under the radar and does not receive as much negative carry as the size of emissions. This is because there is no technological alternative and the shift that creates discontinuity in the market is not yet visible as in the case of renewables and electric vehicles," Garg said. Cement companies with better ESG performance will enjoy premium valuations as comparable ESG metrics evolve, he said.

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