Why imported petcoke dampened Coal India's cement linkage auction

Pet coke's quality is better as its heat value is 8,000 kcl, while that of Indian coal is 3,500 kcl

Despite petcoke prices remaining 108 per cent higher at the end of March 2017 at $ 92 a tonne, which can potentially dent the margins of the cement manufacturers, the companies in the sector continue to stick to petcoke imports rather than substitute the input material with Indian coal.

Recently, in the coal linkage auction for the cement sector, Coal India, which conducted the linkage auction, faced disappointment with the results.

Industry officials reasoned that the primary reason for the industry to stick to petcoke despite higher prices is the quality issue.

"Pet coke's quality is better as its heat value is 8,000 kilocalorie, while that of Indian coal is 3,500 kilocalorie on an average", Mahendra Singhi, CEO at Dalmia Bharat said.

Industry officials cited that compared to petcoke, around 2.5-3 times more coal is needed to produce one tonne of cement.

Normally, on an average, Coal India sells the linkages to the cement companies at Rs. 1,500-1,700 a tonne. However, transport cost and additional Clean Environment Cess of Rs. 400 a tonne makes auctioned coal costlier than petcoke.

"The cess is one of the key reasons why cement companies have shied away from the recent coal auction for cement companies", a senior Coal India official reasoned.

H.M. Bangur, managing director at Shree Cements is of a similar opinion. He added, "Considering the cess and transportation costs involved in using domestic coal, the industry's preference for petcoke will continue".

Recently, this company has secured a 60,000 tonne supply of the G11 grade coal from South Eastern Coalfields - a Coal India subsidiary - over a one year period at Rs. 970 per tonne for its Chattisgarh plant. Bangur, however, said the linkage will not mean any major gain for the company and may translate into a marginal cost reduction for the plant.

The cement plants are mostly located in coal scanty regions like Rajasthan, Tamil Nadu, Andhra Pradesh and Chattisgarh and thus the cost of ferrying the coal from the mines to the cement units becomes costlier.

According to a sector analyst, diesel prices during the nine months ended December 2017 has soared by 12 per cent and the trend continued in January-February 2017, wherein diesel prices have increased by 28 per cent and 32 per cent respectively on a year-on-year basis.

Dalmia Bharat, too, has secured its petcoke procurement at $75-80 per tonne in the near term and will continue to use the material over coal. Singhi reasons that especially the southern cement plants, with access to the Deccan ports, will continue to depend on petcoke.

"We haven't seen many cement companies buy Indian domestic coal yet. Most of them are either considering petcoke from the USA or Saudi Arabia or thermal coal from South Africa currently. Indian demand for petcoke is still being seen despite the price surge", Deepak Kannan, managing editor - Asia Thermal Coal at S&P Global Platts, said.

Cement companies profitability to come under stress

Rating agency, ICRA is of the view that the cement sector's profitability will be coming under stress in the next few quarters owing to the steep prevalent prices of petcoke.

As per data from S&P Global Platts, petcoke prices rose to touch $ 95.75 at the end of December and fell to $ 80.5 during early February. However, by the end of March, it rose again to touch $ 92 levels.

According to Sabyasachi Majumdar, senior vice president & group head at ICRA Ratings, given the large usage of petcoke across companies and the low cost pet coke inventory being exhausted by the companies, the full impact of this price rise is expected to be visible during the January-March period of the 2017 fiscal year.

"While cement plants from the northern region are likely to pass on the rising power, fuel and freight costs on account of a significant increase in the cement prices on a year-on-year basis, the profitability of cement plants from other regions is expected to be under pressure during Q4 of the 2017 fiscal year", he said adding that rising costs continue to put pressure on profitability indicators for cement manufacturers, in coming quarters.

The cement sector, which had dipped by eight per cent during the October-December period is witnessing a demand rebound now and is expected to recover by 4-5 per cent in the 2017-18 fiscal year.
 

Month	Petroleum Coke CFR India East 6.5% Sulfur $/tonne	Thermal coal CFR East Coast India 5500 kcal/kg $/tonne
March 2017	87.4	76.5
February 2017	80	82
January 2017	89.6	82.8
December 2016	95.7	82.9
November 2016	91.1	88.1
October 2016	88.8	75.7

Source - S&P Global Platts