Petcoke ban means gain for Coal India

Concerns for cement makers may ease if they can sustain price hikes

While a ban on petcoke and furnace oil to power up industries in Rajasthan, Uttar Pradesh and Haryana is a concern for cement manufacturers, it is a blessing in disguise for Coal India, the country’s largest coal producer.

It comes at a time fuel costs are on the rise, and will see a further increase with petcoke being banned. Since coal linkages are not easily available, among the few options for companies will be to source coal from e-auctions. Linkage coal is cheaper than the one sourced from e-auctions, while they are not as cost-efficient as petcoke.

The landed cost of imported coal works out to be 35-40 per cent higher than petcoke prices, said Tina Virmani of Kotak Securities.

Binod Modi of Reliance Securities said considering a 20-25 per cent cost difference between imported petcoke and coal costs, the per tonne costs of making cement could increase by ~50-150.

Nevertheless, as cement companies try to source coal, domestic demand of coal will get a leg up. Estimates suggest it takes 200-450 kg of coal to produce one tonne of cement. With about 75-80 million tonne (mt) capacities being impacted by the ban, and adjusting for petcoke use, it may lead to a 15-20 mt of additional coal requirement on an annual basis. This is positive for Coal India, which is aiming to despatch 600 mt of coal in 2017-18. The company is witnessing an improvement in despatches, and in more profitable e-auction volumes and realisations.

E-auction volumes, where prices are higher and are market-driven, have grown 27.9 per cent to 51 mt. Realisations have improved 9.3 per cent year-on-year in the first half of 2017-18.

But, the Coal India stock has been under pressure after its Q2 results, because of higher-than-expected wage settlement provisioning. But, these worries are priced in.

Analysts at JM Financial had said with the wage cost overhang factored in the earnings and stock price, the benefit of operating leverage from growing volumes should reflect in the second half of FY18 and FY19 earnings.

Those at Emkay Global, too, had said the stock price factored in concerns and with an improvement in global coal prices, stronger demand in the domestic market and completion of the wage hike, Coal India was in a better position to take a price hike.

For Shree Cement, JK Lakshmi Cement and JK Cement, though cost concerns may remain elevated, sustainable price hikes can offset the impact. Analysts remain positive on demand improvement during the second half, led by infrastructure and housing.

Modi of Reliance Securities said passing on incremental costs might not be difficult. Thus, their medium-term prospects remain intact.

Besides, all eyes will be on the review petitions filed by cement players and any favourable verdict can boost sentiments. However, an unfavourable outcome or other states banning petcoke use are key downside risks.