The over 13% drop in coal prices in the last one month over worries stemming from an overall weakness in demand due to the spread of the coronavirus is likely to reduce the power and fuel bill of cement manufacturers dependent on imported coal.
The majority of Indian cement companies including Ultratech Cement, ACC, Ambuja Cement, Sree Cement and Prism Cement source around 70% of their coal requirement from abroad, while close to 30% is met from domestic coal.
As there are two components to usage of coal in cement manufacturing — power and fuel — industry experts and company officials are of the view that the drop in coal prices by 13% since mid-February and around 20% from its peak of $85 per tonne in May 2019 to $65 per tonne as of now will bring down the cost of electricity for cement companies dependent on coal-fired captive power plants, as well as the fuel cost for companies dependent on imported coal. This will positively impact the profitability of the firms as well.
Ravi Soda, senior vice-president at Elara Capital, told FE, “Those cement companies that are 100% dependent on captive power plants fired with thermal coal for their power requirements, are likely to see their electricity cost drop by Rs43 per tonne in Q4FY20, while the fuel cost for companies dependent on imported coal, is expected to drop by Rs’95 per tonne of cement sold.”
“This will have a positive impact on the profitability of the cement companies as well,” Soda said. Dipesh Dipu, partner, Jenissi Consultancy, a Hyderabad-based consultancy firm, said, “Every Rs’100 drop in coal prices reduces the power cost by 8-10 paise. In the current situation the cement companies are likely to benefit by Rs’1.40 paise since the drop of coal prices since October. However, it may vary for companies depending on the quality of coal used by them.”
The Richards Bay coal imported from South Africa has 5,000 to 5,500 kilo calorific (kcal) content, while the one imported from Indonesia has 6,500 kcal. Indian coal which is blended with imported coal has 4,500 kcal content. Vinita Singhania, vice-chairman and MD of JK Lakshmi Cement, however, noted there is no doubt the coal prices have come down substantially and it should have a positive impact on power and fuel cost of cement producers but only if the coal gets supplied on time. “Due to coronavirus impact the backlog on seas have increased as suppliers are not shipping on time. Also, I believe once China will start buying prices will move northwards again,” Singhania said. However, she was not sure how long the coronavirus scare will last.
Going forward, it is believed if the drop in energy prices, including crude oil, sustains and gets reflected in diesel and pet coke prices, the already benign cost environment for cement manufacturers could turn further favourable in coming months.
