The coal shortage story: An impact on the Indian Cement Industry
The coal shortage situation in India over the last few months has assumed gargantuan proportions. The manifold reasons being given behind the shortage situation is lack of railway wagons for transporting coal, the green activism perpetrated by the Ministry of Environment and Forests (MoEF) and an apathy towards the development of infrastructure in transporting coal. This has led to a major impact on operations at cement companies which are already burdened with weak demand and an overcapacity situation.Green ActivismThe country’s state owned coal major Coal India Limited (CIL) has issued a warning that if the present system of issuing green clearances continues to remain in vogue, coal reserves in the country may become non mineable. The Maharatna company has stated that if the paucity in coal production was not addressed by the government, the country is likely to face a shortage of around 1,000 million tonnes of coal over the next five years, which accounts for the 12th plan period of 2012-17. CIL is awaiting clearance for around 178 projects and if the same is not granted, it accounts to a denial of around 200 million tonnes per year. New and more cumbersome directives are being issued by the MoEF for granting clearances like adhering to the Forest Rights Act. CIL has also been told that they must furnish data from the Differential GPS (DGPS) before their projects are taken up for consideration. The coal behemoth has also been told that they will have to mull over paying annuity for the project affected population. Another directive from the MoEF has made it compulsory for CIL to secure Forestry Clearances (FC) before getting Environmental Clearances (EC). Earlier, the company used to secure Environmental Clearances, commence mining in a particular area and then apply for Forest Clearances. However, the new clearance regime has mad functioning in new coal mines difficult.
Procedural DifficultiesA stage has been reached by CIL where it is not in a position to augment coal production from existing mines or through starting new mines. Data provided over the last few years denotes that there has been a slowdown in coal production by CIL. The company’s coal production was pegged at 323 million tonnes in 2004-05 which further increased to 431 million tonnes in 2009-10, a rise by over 100 million tonnes in 5 years. In 2010-11, the coal behemoth registered a zero growth production figure. CIL has also not been in a position to projectise virgin coal blocks due to a past faulty government policy. The company had stated that starting 2011-12 till 2036-37, it could produce 500 million tonnes of coal per year if it was allowed to retain 289 virgin coal blocks out of a total 499 coal blocks for meeting its long term requirement. The 289 coal blocks, known as CIL coal blocks were potentially mineable with developed infrastructure in form of rail, road power etc as compared to other 174 coal blocks which included those to be given to private parties for captive mining or were unexplored or away from developed infrastructure. However, the Ratan Tata headed Investment Commission of 2006 recommended a de-reservation of the CIL blocks which was accepted by the Prime Minister’s Office (PMO).CIL was in plans to projectise only 150 blocks till 2011-12, the remaining fully explored virgin CIL blocks, totaling 79 blocks, were de-reserved. Due to the go/no-go controversy, many of CIL’s virgin blocks which the company had planned to projectise by 2011-12 cannot be explored as they lie in dense forests with newer coalfields or existing forests with already high levels of production. This has seriously hampered CIL’s coal production capacity and the company is desperately looking at clearance of these blocks for the opening of new mines and augmentation of its production levels.Impact on cement companies and the road aheadCommenting on the effect of the coal shortage situation on the cement industry, Mr R.K.Sachdeva, coal consultant stated, "the shortage of coal will not have a major impact on cement production in the country. However, the cement industry is not serious about consolidating its requirement of coal. Captive mines which have been allotted to coal companies are not looked after and developed by the companies. The bigger players in the industry are not suffering much on account of the shortage situation."Till three to four years back, the cement industry did not import coal for manufacturing cement. However, in recent times with a shortfall in coal production, imports of coal for cement production has increased, leading to a rise in cement production costs. "The cement industry has become more price sensitive with the increase in imports of off spec coal from South Africa. Various cement companies which were importing petcoke earlier have resorted to importing thermal coke which is cheaper and has a high sulphur content." Opined Mr Jitendra Roy Choudhury, Manager-Analytics, Salva resources. Reiterating further, he said, "there is no quick fix solution to the problem of coal shortage and Indian cement companies will have to bear with the situation. Developing a coal mine in India requires a lot of time and the main hindrances in the process are statutory regulations and various clearances to be obtained from the concerned authorities. The cement companies which are in possession of coal mines do not have any extensive experience of maintaining them. hardly 2.5 percent of the total domestic production."However, it is expected that the Indian cement market which is largely dominated by big players like UltraTech, Jaiprakash Associates, Shree and India Cements, only the midsized and smaller players will suffer if the prices of coal increase further. However, even the bigger players have reiterated that any further hikes in coal prices will be pushed on to the consumer as the companies cannot keep on selling material at lower prices even as input costs escalate.ConclusionThe coal shortage situation needs to be addressed quickly by the coal manufacturers in order to ensure the smooth functioning of cement companies. This can be achieved through the proper facilitation of a smoother environmental clearance system by the Ministry of Environment and Forests (MoEF), augmentation of coal production by coal manufacturers from their existing mines and new mines as well as cement companies switching increasingly to alternate forms of energy.Mr Sumit Banerjee, Vice Chairman Reliance Cementation spoke to ICR on the impact of shortage of coal on the Indian cement industry. Given below are the excerptsAre you experiencing any shortfall in coal supplies? If yes, since when and could you quantify it in terms of numbers?Coal is the primary source of energy for cement manufacturing and has a significant impact on its business. A widened demand-supply gap, which stands at about 130 million tons this year, would necessitate an increase in costly imports putting industries’ margins under pressure.What are the steps, you feel, should be taken by coal manufacturers to rectify the situation?Coal manufactures should accelerate coal production from all its existing mines and simultaneously explore new mines to address the shortfall. This off-course has to be supported by favourable regulatory and environmental policies and privatization of commercial coal deposits.Have you planned any steps to tackle the shortage situation? If yes, could you elaborate on the same?
It is an imperative for the industry to not only explore alternate sources of fuel/energy but also strive to enhance operational efficiency through deployment of advanced technology in waste heat recovery systems. There is a huge potential for increasing the usage of alternative fuels in India as it generates over six million tonnes of hazardous waste and about 50 million tonnes of non-hazardous and municipal wastes, apart from a large quantity of agro-waste. However, to harness this potential the industry needs to work on appropriate supply chain infrastructure and the government needs to facilitate this through enabling policies.In case of importing expensive coal, what will the effect on the profit margins of the companies?
The impact on profit margins would vary from company to company based on the mix of linkage coal, open market / imported coal and pet coke. However, at the industry level, the average impact on EBITDA margin could vary in the range of 1% to 1.2% considering that the open market coal has to be replaced with imported coal, due to domestic shortfall. Besides, the cement companies will also be exposed to the volatility of global coal prices.What support do you expect from the government in this regard?This situation could change in the longer term by providing equal opportunities while granting mineral concessions to Private Sector Companies like in other non strategic minerals. Also Government could encourage privatization of commercial coal minesWhat effects do you foresee on the cement export sector on account of the coal shortage problem?
Cement exports from India is negligible and accounts for only ~2.5% of the total domestic production and hence no major impact is envisaged
Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings
Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.
The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.
Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.
Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.
According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.
Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.
Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.
The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.
The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.
The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.
Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.
Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).
According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.
Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).
Wonder Cement shows journey of cement with new campaign
The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…
Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.
#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.
Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."
The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.
Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."
According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.
In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)
Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint
Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.
Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.
But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.
The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.
Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.
Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."
Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.
Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.
However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.