No more cheap coal for cement industry?

The coal ministry is working towards a "February-end" deadline to finalise a policy which may phase out cheap coal availability to the aluminium, cement and steel industries.

The inclusion of these industries in the "non-core sector" pricing band, may lead to a 30 per cent hike in the cost of coal, a key input.

Companies such as Hindalco, National Aluminium Company Ltd (NALCO), ACC, Grasim and Gujarat Ambuja are likely to witness a significant decline in margins if the proposal is accepted, according to a recent report by First Global.

The suggestion for the proposal came from the prime minister's Energy Coordination Committee (ECC), which is in favour of 'non-core' pricing for aluminium, cement and steel industries as they charge market prices for their products, a ministry official informed.

The aluminium sector would be the worst hit because it is highly power-intensive and coal costs form a significant portion of the overall cost of production, according to N Nagarajan of CRISIL Research and Information Services. The margins of these companies could get compressed up to 3-5 per cent, he added.

For cement companies, "with this move, their margins will get hit by 2-3 per cent," says A K Sarauji, chief financial officer, JK Cement. The proposed move would have to be passed on to the consumer and would also fuel inflation, he warns.

The steel industry won't be affected because it uses coking coal, which is largely imported.

The committee finalising the definition of the core sector is headed by the coal secretary. The final decision will be taken only after the ongoing consultation process with the stakeholders is over.

Coal India supplies the majority of its coal produce to the core sectors, which include power, steel, cement, aluminium and fertilisers through long-term contracts at government-notified (read low) prices. The rest of the coal is sold to the 'non-core' sectors through e-booking at a premium of 30 per cent over the notified price.

Industry observers feel that a higher price of coal may force some of these companies to shift to alternate fuels like gas.