The Pet Coke Opportunity
The cost of manufacturing cement depends on the input cost of fuel. Pet coke, as a fuel, had to some extent answered this issue over the last couple of years. But the recent decision to review use of pet coke by the country's apex court is likely to be a major blow to the use of this commodity.
Over the past of couple of years, cement producers have been heavily depending on pet coke as a fuel and the same has helped many plants to keep their costs under control. Of all the players operating in the cement domain, Shree Cement has been the pioneer in this trend. However, the use of pet coke goes through its own unique ups and downs, since the price of crude oil keeps fluctuating.
The above chart clearly indicates the dependence of cement companies on pet coke. It also indicates how vulnerable these companies are for any adverse decision on use of pet coke. In case if there is a ban on use of the commodity, one can only imagine what will happen, because today the focus is on environmental concerns.
A Kotak Institutional Equities report has highlighted two scenarios and its impact on earnings of some large-cap cement companies (see chart above).
First, substitution of pet coke with e-auction coal would result in a nearly 21 per cent increase in per unit fuel costs. This doesn't include the impact of higher transportation costs. Second, imposition of a clean environment cess of Rs 800 per tonne on pet coke usage would result in a nearly 10 per cent increase in per unit fuel costs, the report says. However, the price factor today is tilting in favour of the cement companies, considering the numbers involved.
Interestingly, average pet coke prices have declined from a peak of $96/tonne seen last year, but this is not something that cement makers can cheer about. According to data provided by S&P Global Platts, the price of pet coke 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.
Considering the volatility of the prices of both coal and pet coke, the real effect will be known only by the end of the present quarter.
Today the real problem is not the price, but the focus, which has shifted to environmental issues. Whether the cement industry will be allowed to use pet coke as a fuel at all is the million dollar question.
According to media reports, the Environment Pollution (Prevention and Control) Authority is considering imposing a ban on polluting industrial fuels such as fuel oil and pet coke 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.
One simple answer to this impasse is to raise cement prices and pass the burden on to the end user. But in a scenario where the demand is not picking up, will cement manufacturers be able to pass on the price increase so easily?
The court's diktat
The Supreme Court recently directed the Centre to take a decision within a fixed time-frame on banning polluting fuels like furnace oil and pet coke used in industrial plants. It termed the use of pet coke and furnace oil used by various industries as the "single biggest source of pollution" in Delhi and NCR. It wants natural gas and electricity to be used as an alternative. The Supreme Court had mandated a meeting of EPCA to ban pet coke and seek alternatives to the fuel in the National Capital.
The order came from the bench headed by Justice Madan B Lokur on the recommendations of the EPCA.
Emphasising that quality of fuel plays a critical role in the quantum of pollution generated, EPCA and the CSE had earlier informed the SC that sulphur level in furnace oil and pet coke is multiple times higher as compared to other fuels. "The key contaminant in fuel, responsible for high levels of pollution, is sulphur. It is for this reason India has moved from petrol/diesel with 10,000 ppm of sulphur in 1996 to 50 ppm in 2010 (to be extended nationwide in April 2017)," said its report filed in the SC.
A senior official in the Ministry of Environment, Forests and Climate Change, told the media that currently the proposal was only to ban these fuels in Delhi-NCR. "The Environment Pollution Control Authority has given its view on the issue of pet coke. We will file an affidavit with the SC soon," the official said. When asked about a possibility of a pan-India ban, the official said the matter was "under consideration" and the Ministry was "taking views" on an all-India ban. However, no decision has been taken yet.
What experts say
Sunita Narain, Director-General of the Centre for Science and Environment and Member, EPCA, says, "We have recommended a ban on pet coke in Delhi-NCR, but one needs to look at banning it across India as it is a very highly polluting fuel." She adds that a restriction was needed on the import of pet coke, which is a refinery by-product, as countries such as the US and China were using India as a "dumping ground".
The EPCA has currently recommended that the use of the fuel be allowed for cement manu-facturers, but not for captive power generation.
The cement industry, however, is still concerned about the possibility of a blanket ban and what it could mean for the industry. Independent cement manufacturing consultant JD Bapat says, "The (probable) ban will offset the energy savings and lowering of ash content that come by using pet coke. Due to its higher calorific value, pet coke generates higher energy than other available resources such as mineral coal. The sulphur content too, is removed before it goes to air in cement manufacturing."
The possible ban on pet coke has dampened the prospects of captive power producers and cement manufacturers that prefer this fuel as an alternative to more expensive fuels. Rajiv Agarwal, Secretary, Indian Captive Power Producers Association, says, "Pet coke is the currently available fuel for captive power producers, as larger volumes of coal are diverted for independent power producers and public sector power generation projects. Generally, power producers use a mix of 20 to 30 per cent pet coke with coal to keep sulphur emissions under check and to sustain the life of the plant. The government will have to ensure free availability of cheap coal if they want to go ahead with the ban."
From the various reactions captured above, the solution is not going to be simple. Will pet coke fire up India's cement kilns? The industry is waiting, biding its time... and watching.