A few months back, in April 2017 to be specific, we wrote in these columns that "Looking into the future, we are left wondering if pet coke is really a sustainable cost advantage, or an environmental adventure that can backfire". To further explain, we had stated as our view, that firstly, the cost advantage had turned volatile, given the inherent fluctuations in international coal prices, pet coke prices, shipping costs, and currency rate changes, all of which induce a lot of uncertainties in the cost savings between landed cost of coal and pet coke on the basis of Rupees per unit of calorific value. Secondly, and more significantly, various stakeholders like environmental activists, regulators, green courts, and civil society members have started looking down upon pet coke to be an utterly unwise fuel choice from the environmental perspective. Looking back today, it would appear that some of what we anticipated have actually happened, lending an amount of credibility to our thoughts.
From April to this day, it has been a veritable roller coaster ride for cement plants using pet coke as fuel, in part or in full. The ride has been particularly daunting for those cement plants located in states bordering the National Capital Region. It has actually been somewhat like a "do’s and don’t’s" lesson in risk assessment and mitigation, at least on hindsight. What exactly happened?
Well, a lot of things, actually! Over the last few years, consumption of pet coke has spiked in India, driven particularly by the cement industry, and also by some of the power generating stations, and imports have sharply increased as well. Currently, India has been importing around 12 million tonnes of this fossil fuel, in addition to using up our own domestic production of around 12 million tonne. How did this growth of pet coke consumption come about? Many cement factories have been spending considerable amount of time and money to learn how to use more and more pet coke in their kilns without destabilising their chemical processes. In doing this, cement companies were goaded and incentivised by price increases and auctions by Coal India, threats of gradual withdrawal of so called "linkage coal", and similar other environmental stimulus. On the other hand, consider the negative signals emanating from the external environment, such as, the largest domestic producer of pet coke has invested in a huge gasification facility to enable in-house consumption of pet coke, and consider also that international prices of pet coke has been exceedingly volatile. But, recently, a few disruptive things happened in quick succession.
What with the high levels of pollution Delhi, the National Green Tribunal banned use of furnace oil and pet coke in states neighbouring the capital region. There was also a lot of focus on high-sulphur pet coke because of its adverse impact on environment. ET reported that this move could impact the earnings of the relevant cement companies by as much as 8 per cent. Then, after hectic lobbying, there was a relaxation for cement kilns, given its capacity to burn pet coke in an environment-friendly manner. But the relaxation came with a suggestion to nudge the government to discourage pet coke use, including considering a ban on its imports. But the government reacted in the only way governments can – by imposing an import duty on the commodity. Now, this was an interesting move, in that, it increases the indirect tax revenues of the government, but more interestingly, this immediately gave an opportunity to even the domestic suppliers of pet coke to jack up prices in a proportionate manner.
India Ratings said in its report, "The operating margins of cement companies, which use high proportion of pet coke are likely to be affected following the government’s decision to increase the import duty on pet coke to 10 percent from the present 2.5 per cent. The operating margins of cement manufacturers may fall by about 1 per cent, if the increased cost is not passed on to end users," – coming on top of a 32 per cent rise in pet coke prices already in the first half of FY18, with a 44 per cent hike in coal prices and a 7 per cent increase in diesel prices to boot, this is bad news for the cement industry.
So, it appears that this roller coaster ride has turned out to be rather distressing, and not so much of an enjoyable encounter for the cement players. An environmental adventure that really backfired!