The pet-coke saga
The pet-coke saga

The pet-coke saga

For quite some time now; pet coke as fuel replacement has played a significant role in the overall cost of production. However, in the recent verdict, Supreme Court has asked Uttar Pradesh, Rajasthan and Haryana to stop the use of pet coke. On this background, ICR takes a look at the impact of the recent order.

The Supreme Court in its latest order dated October 24, 2017 has put a ban on the use of pet coke, furnace oil in Uttar Pradesh, Rajasthan and Haryana from November 1, 2017. The Supreme Court has directed the governments of Uttar Pradesh, Haryana and Rajasthan to ban the use of pet coke and furnace oil in the industries and made it clear that their failure to do so would force it to ban these materials from coming November 1. A bench of Justices Madan B Lokur and Deepak Gupta slapped a fine of Rs 2 lakh on Union Environment Ministry for not finalising pollution emission standards for industries using pet-coke and furnace oil in the national capital region (NCR). Advocate Aparajita Singh, who is assisting the court as amicus curiae in the matter, said the three states have been asked by the court to ban the use of pet-coke and furnace oil in the industries. Earlier, the apex court-appointed Environment Pollution Control Authority (EPCA), in its report to the top court, had recommended that distribution, sale and use of furnace oil and pet-coke would be strictly banned in NCR.

The court, in its May 2 order this year, had noted that the use of furnace oil and pet coke was prohibited in Delhi. The bench was also told that governments of Uttar Pradesh, Haryana and Rajasthan had no objection if a ban was placed on the use of furnace oil and pet coke. It had granted them the liberty to place such ban. The court was hearing a PIL filed in 1985 by environmentalist M.C. Mehta who had raised the issue of air pollution in the Delhi-NCR.

Earlier, the court was told about the ill-effects of pet-coke and furnace oil used in the industries on ambient air and it was said that emissions from such units were highly toxic as these discharged high sulphur content.

Analysis
From November 1, 2017, Rajasthan-based producers will be shifting to coal, i.e., mainly imported coal, thinks Vaibhav Agarwal, Vice President, Cement & Corporate Access, Institutional Equity Research, PhillipCapital (India). "The cement industry should be allowed to use pet coke as most of the plants are environment compliant and cement kilns are the best place to burn pet coke in an environment friendly manner. The court order assumes to be of the view that whole of Rajasthan forms a part of NCR which is not correct. Only areas of Rajasthan, which falls within a limit of 150-200 km from NCR, should be banned from using pet coke and not whole of Rajasthan. Subsequently, Central Pollution Control Board has now issued a clarification. The order of ban will apply only to districts of states of Rajasthan, Uttar Pradesh and Haryana that fall within the NCR region. This is subject to the respective state governments notifying this ban in such districts by November 1, 2017; failing so the ban will apply to whole state. We don't see any cement manufacturer getting impacted by this ban immediately if the respective state governments issue such notification," he adds.

"Cement companies have made huge capital expenditures for getting compliant to environment norms. Only plants which remain non-compliant to environment norms should be banned," adds Agarwal.

Concerns
Industry is concerned about the pending inventories of pet coke (which may vary from 15 days to one month or may be higher on case to case basis.) Another concern is of storage facility. Considering that calorific value of coal is much lower than pet coke, the quantity of coal required as a fuel to replace pet coke will be much higher. All cement companies do not have adequate storage facilities. Also they believe that the ports do not have adequate facilities to import such huge quantities of coal and hence getting sufficient quantities of imported coal is not easy. If Indian coal is not available in such quantities, alternate arrangements have to be worked out.

On per calorific value basis the cost difference is 7-8 per cent between pet coke and coal and this can imply approximately 10 per cent increase in fuel cost. Power cost will also increase. Over all we may expect the cost to increase by Rs 7-10 per bag (including incidentals)

Industry take
Shift to coal (either Indian or imported) appears a given from November 1, 2017. Industry is taking the necessary legal steps for challenging the order. None say that they are concerned of costs and it will be industry wide phenomena for all producers. As it appears to us, whole industry expects cement prices to increase to pass on the cost-push. Concerns are not of a shift in the fuel change but more structural related to storage facilities, technicalities with machinery etc. Cement prices will run up from 1st Nov'17. None is saying this can have any impact on production on sustainable basis. It is an eventuality which the industry will have to learn to live with if the order is not reversed. There may be a short term supply-demand mismatch (till the industry gets required quantity of coal) which may lead to spike in cement prices. This will be a positive news flow for adjoining non-Rajasthan based players (especially for players based out of Madhya Pradesh and Gujarat - HeidelbergCement, Sanghi Industries, etc.) as then can push supplies to Rajasthan market in case of any supply-demand mismatch in Rajasthan.

Impact on stock market
Negative news flow for all Rajasthan based producers unless they are able to pass on the cost push - Shree Cement, JK Cement, JK Lakshmi Cement, Mangalam Cement, UltraTech Cement, Ambuja Cement, ACC and all other Rajasthan based producers. The only neutralising factor as it appears today is cement price hikes. Haryana and Uttar Pradesh don't have integrated cement plants (except grinding units) so this news does not impact these regions.

Source: With inputs from Vaibhav Agarwal, Vice President, Cement & Corporate Access, Institutional Equity Research, PhillipCapital (India) Private Limited. Mumbai 400013

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