Cement players to weather coal shortage for now: CRIS INFAC

June 30, 2005
CRIS INFAC

The Indian cement industry is likely to face a coal crunch in the short to medium term as per a recent study carried out by CRIS INFAC. This squeeze is similar to that being experienced by other coal consuming sectors like power and sponge iron in the wake of inadequate investments in the coal mining sector over the last few years. However, the financial impact of this on the cement players will be marginal over the next two-three years as the overall consumption pattern of leading players is unlikely to change significantly and because pet coke could emerge as a viable alternative to coal after IOC commences supply from its refineries. However, coal availability will emerge as a significant operational hurdle for new plants as their cost structures will be impacted considerably.

CRIS INFAC expects the non-coking coal deficit to mount to 29 million tonnes by 2006-07. While strong demand from end-consumers like power (in view of government focus on improving power deficit scenario), sponge iron and cement will drive the demand for non-coking coal, inadequate investments in developing coal mining infrastructure will result in the coal supply failing to keep pace with the demand. This will further worsen the already critical deficit scenario of domestic coal for consumers, like cement, power, etc. In its latest report analysing the impact of the coal deficit on the cement industry CRIS INFAC expects that the deficit will be met through import of coal in the short term and through pet coke and alternative fuels over the long term.

According to Mr. Sudhir Nair, Head, Research, CRIS INFAC, "Although coal mining was opened to the private sector, none of the cement players. have yet been awarded mining rights. Thus, the cement players will have to meet the cement deficit through the import of coal."

Adds Mr. Nair, "However, in the long term, pet coke will act as an apt substitute for coal, thereby reducing the industry's dependence on coal."

With Reliance being the only domestic supplier of pet coke, the availability as well freight cost involved made the fuel unviable for most cement plants. However, IOC is expected to soon commence the supply of pet coke from its refineries. This will not only make the fuel available at economical distance for most cement plants, but also bring down the prices of pet coke. Thus, pet coke would emerge as a strong alternative to coal and reduce the dependence of the cement industry on domestic as well as imported coal.

In the near term, the need to meet the deficit through imported coal is unlikely to have a significantly impact on the overall cost structure of the cement industry. CRIS INFAC study reveals that, although cost of imported coal per tonne of cement is almost 80 per cent higher than the cost of domestic coal, the share of domestic coal in the total fuel requirement (which currently accounts for around 65-70 per cent) to decline only marginally to 60-65 per cent in view of the coal shortage. As a result the increase in the overall cost for the cement industry will be limited to only around Rs. 7 per tonne (30 basis point impact on operating profit margins).

The impact however will vary among cement plants depending upon their location (ports - in case of coal imports and refineries - in case of pet coke) and current share of domestic coal to total fuel requirement. On the other hand, for newer plants that do not get any domestic linkage for coal; the impact will be much more significant as they will have to source their entire coal requirement either from the open market or through import, thereby adversely impacting their cost structure.

Concluded.

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