Low coal supply likely to hit cement companies

With declining linkages, industry is forced to resort to open-market purchase at higher cost.

Lesser coal availability may affect the domestic cement industry. With coal requirement set to more than double in the next five years, lower coal supply is pinching cement firms.

The cement industry consumed around 25.35 million tonnes of coal last year. Of the last year's offtake, 14.18 mt was through coal linkages from Coal India (CIL) and Singareni Collieries (SCCL), which in the past had been over 20 mt.

According to a report of the working group on cement industry for the eleventh five-year plan (2007-12), the annual coal requirement will jump to 58 mt by the end of the Plan period, with cement companies scaling up capacities to 300 mt "" over 75 per cent more than the current capacity. 
 

FEELING THE PITCH Cement industry's coal intake from different sources
In mn tonnes	2002-03	2003-04	2004-05	2005-06	2006-07
Linkages	12.35	13.35	14.84	14.81	14.18
Import	3.56	3.18	3.63	3.40	4.50
Open market	0.77	1.03	1.27	1.55	3.67
Other	1.09	1.52	2.63	2.98	3.00
Total	17.87	19.08	22.37	22.74	25.35

The cement industry is entitled to have 80 per cent of its requirement through linkages. But the actual share is less than 60 per cent, with the remaining requirement being met through the open market and imports.

Moreover, as a majority of the new projects are with captive power plants (CPPs), the coal requirement is set to rise further. CPPs consumed around 5 mt of coal last year, accounting for 20 per cent of the industry's total coal consumption. By 2011-12, it is set to rise to over 18 mt.

Market players said the linkages would dwarf in front of the overall need. The open market would have to be more relied upon, where coal was costlier by around Rs 800-1,000 a tonne. This might lead to an increase in cement prices, they added.

Manoj Gaur, president of the Cement Manufacturers' Association and executive chairman of the Jaypee Group, said, "Availability of coal is a matter of concern. Currently, hardly 75 per cent of the coal supply through linkages is getting materialised."

The 170 mt cement industry got less than 4 per cent of the total coal production last year. During the last five years, coal consumption by the industry increased by 42 per cent, whereas the supply through linkages grew by a mere 15 per cent.

H M Bangur, managing director, Shree Cement, said, "Future requirement of coal is much higher and we are not getting adequate quantity. Upcoming capacities will have to procure coal from the open market as they may not have linkages facilities. Coal, so procured, will be around Rs 800-1,000 (a tonne) more than what the industry gets from linkages."

According to a section of analysts, linkages should be provided to those commodities where the price is controlled. As the country's economy is growing at a robust pace and cement prices are no more controlled, linkages to the industry should be removed. Instead, linkages benefit sectors such as power and fertilisers, where prices are controlled, and they should continue.

Unsatisfied with this argument, market players said the government should give preference to the cement industry, given the fact that infrastructure projects are booming in the country.

"There is a lack of a clear-cut policy from the government on long-term coal linkages for the cement industry. Though the industry has the option of buying from the free market and several players are importing too, high rates become the concern then," said A K Saraugi, chief financial officer, JK Cement.

Recently, the coal ministry decided that the cement industry should obtain its additional coal requirement through e-auction in the open market through electronic bidding.

However, the players said that it would prove detrimental as it was cumbersome and the quality was also not assured. They expressed apprehensions that there was no certainty that bids of cement companies would succeed.

Moreover, with the power sector adding 70,000 mw in the next five years, consuming a substantial share of coal, the cement industry, which itself requires 2,000 mw during the same period, could face tough times ahead in procuring the raw material.