The petcoke threat to cement companies

06 March 2017

While demand for cement has had its ups and downs each quarter, the one thing that remained constant is concern over petroleum coke or petcoke. All this while apprehensions were about movement in petcoke prices, but soon the focus might shift to environmental policies on usage of petcoke—a key input material for cement companies and a highly polluting fuel.

Let’s take the cost factor first. Though average petcoke prices have declined from a peak of $96/tonne seen last year, this is not something that cement makers can cheer about. According to data provided by S&P Global Platts, the price of petcoke delivered to India is currently at $79/tonne. Similarly, prices of thermal coal, Richards Bay 5,500 kilocalorie/kg net as received, a grade bought by Indian buyers, has cooled off from its high of $78.05/tonne last year to $73.61/tonne in January 2017.

But on a year-on-year basis, petcoke and coal prices are still double of what they were, and most cement makers are likely to have exhausted low-cost petcoke inventory by now. Thus, as some analysts point out, the full impact of the movement in petcoke and coal prices is expected to be felt in the current quarter, hurting profitability.

Power and fuel cost account for 27-29% of the total operating costs for cement companies and with petcoke and coal prices still high, the impact on margins could be in the range of 250-350 basis points in fiscal year 2018 if they fail to pass it on, rating agency India Ratings and Research said in a report.

Now, let’s move on to a larger problem that might be awaiting cement makers.

According to some media reports, the Environment Pollution (Prevention and Control) Authority is considering imposing a ban on polluting industrial fuels such as fuel oil and petcoke in the National Capital Region in a bid to curb air pollution. Expectations are that the government might extend the policy on polluting fuels to other parts of the country over a period of time.

In the past few quarters, cement makers have been increasingly relying on petcoke since it is a cheaper alternative to coal. What makes the latter dearer is a clean environment cess of Rs 400/tonne currently levied on it. Thus, taxes on petcoke or restriction on its usage as a fuel for cement plants would push operating costs higher, adversely impacting margins.

A recent Kotak Institutional Equities report has highlighted two scenarios and its impact on earnings of some large-cap cement companies. First, substitution of petcoke with e-auction coal would result in a nearly 21% increase in per unit fuel costs. This doesn’t include the impact of higher transportation costs. Second, imposition of a clean environment cess of Rs800 per tonne on petcoke usage would result in a nearly 10% increase in per unit fuel costs, the report said.

Source – Livemint