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Advantage Coal

Published

7 years ago

January 11, 2018

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India will do better by concentrating on improving expertise in underground mining and logistics, if the rising cost of coal needs to be mitigated in the future.

India remains uniquely advantaged on coal, not just because of the reserves (43 years of current consumption) as part of the natural endowments, but because the cost of extraction is also low, thanks to the overall current stripping ratio of the entire system. What one pays for coal however, where a substantial component is government revenue is another matter.

Stripping ratio, which is the ratio of overburden or the waste rock (non-coal deposit that must be removed to get coal) in cubic meters and the coal extracted or produced in tonnes. So when stripping ratio is one, it means to remove one tonne of coal 1 cubic meter of overburden was removed. When stripping ratio moved up above 3 cubic meter, the cost of coal production would increase as three times the amount of overburden has to be handled and sometimes re-handled.

Thankfully the current stripping ratio of the entire Coal India production at the aggregate level is 1.63, a number which is one of the lowest in the world. Practically, most mining in India has remained open cast because of this reason, for higher stripping ratio one would need underground mining, which needs a higher capital outlay and manpower as well.

But it could also mean that India has taken all the advantages of all the low hanging fruits that lay in the last several decades and left out the deeper extraction to the future, which would entail under-ground mining and higher costs as well.

Underground mining also would mean higher levels of skills and adoption of the safest technologies and processes. This is where the attention needs to be focused on.

India has hardly invested in underground mining, out of the Capex outlay in Coal India, a bulk of which is for underground mining, the actual progress against plan leaves a lot to be desired. Also there is an increased emphasis of avoiding underground mining by moving to opencast. Underground mining remains the dominant method of mining in China where large forest cover exists and where stripping ratios are high.

If we account for the near future production plans, the future stripping ratio would be closer to 2.67, a jump of 60 per cent, which would also mean a cost escalation of 30 per cent. But considering the blocks that have been offered to the private sector through auctions, the average Stripping Ratio would be well above 4, which is also one of the reasons why most of the auctions have become unattractive to the private sector. The Government has also not made the economics attractive by making the right allowances for balancing the high cost of extraction ordained by the high stripping ratios.

The deeper question is at the current stripping ratio that actual cost of production of coal is really quite low, in spite of the high overheads Coal India could be carrying as a public sector.

Why then would the price of coal actually paid for be so high? Well, the answer is very simple that the price includes all forms of taxes including GST and Clean Energy Cess, which goes as revenues to the Government, Center and State included. How much is this? It ranges between 30 per cent to 60 per cent of the price of Coal that is offered as part of fuel-supply agreements or linkage or linkage auctions. This could change if the auction premia move up, but for coal blocks under auction, the total revenues received by the government would be much higher than the 60 per cent mentioned.

This is also another unique feature of coal pricing, the rationale being that the money collected from coal would be utilised for development of the lowest sections of the country, especially in the coal belts. The Clean Energy Cess is also meant for the allowance for subsidies in the renewable sector, which would be enjoyed by the industry at large.

Coal demand in India had been growing rapidly in the past at a CAGR of close to 10 per cent, but only recently it has come down to a CAGR of less than 5 per cent, thanks to the renewables, which has shown 30 per cent YoY change, although on a smaller base. The economics of renewables is also looking up with unit costs drastically coming down making it far more attractive. But renewables would still remain far from being the main staple as long as coal supply continues economically and efficiently, the reason being that renewables with unpredictable and low power factor would continue to remain a filler-energy source while the main staple would remain as coal, at least for India.

The demand for energy is growing not only for the power producers, but also by the industries that use it for their captive consumption and also as part of feedstock, like in aluminum and cement. With imports into India touching 200 MT, it is also a missed opportunity that India with such high reserves would have to still depend on imported coal, the challenges most often is in the area of logistics.

Coal is sold by Coal India on the FOB basis, which means that the cost and burden of transporting coal to the end use plants remains with the buyer, so there is no urgent need for Coal India to look at logistics as an important driver of results. Coal India has Director Commercial, Director Finance but no Director Logistics, for this very reason. So much of Coal India’s logistical challenges is left to the end-use industry to sort out together with Railways. Why Railways? Around 60 per cent of Railways’ revenues come from one single commodity, which is coal, so Railways as an Interested Party steps into the scene to sort out logistic challenges. Economically anything above 400 km is better by Railways, in any case.

But is it the right way that coal logistics issues can be sorted out on a sustainable basis. Well no, because logistics plan of Coal India on its outbound must marry with the logistics plan of Railways, which also moves scores of other stuff; at the end of the day the movement must be optimized such that we have overall net gain from the allocation into the various commodities.

This year, we have seen from April to June, higher allocation of rakes to the coal sector on ad-hoc basis, which instead of increasing the coal movement by rail, actually brought down the actual movement of coal in tonnage terms. This was because empty movement increased over longer leads and the overall feed into the coal sector got reduced.

If one looks at coal traffic by rail in the recent years, FY16 and FY17 had actually seen lower per cent movement in Ton-Km share (44 per cent in FY15, 43 per cent in FY16 & 40 per cent in FY17). Most spillover to the road is uneconomical with higher losses and theft. What has been alarming is the rise in the cost recorded in Rs per tonne KM, which has grown exponentially from 1.6 to 1.9 in a span of three years.

Logistics is not just moving stuff, but moving it efficiently and economically. If the cost of moving coal increases by 15 per cent YoY, this raises the cost to the end-user straight away and it is the rising trend of these costs which is alarming. It comes from the four specific dimensions:

-Tariff increase by rail
-Cost of congestion
-Cost of demurrage and detention
-Cost of alternative arrangements due to non-availability at the stipulated time The solution to these issues lie in a holistic approach of Coal India and Railways to marry their logistics plans and ensuring that the projects undertaken for doubling of lines and investing in wagons happen in the areas where this is topmost priority. The new auctions would open up new traffic or a reallocation of coal movements, this should be integrated with the logistics plan of railways as well.

On per capita basis coal consumption in India dwarfs the other comparable nations, it is not because there is a demand issue. There is a supply issue, if we have to reach China’s level one day, we would need four times the movement by rail from the current level of 500 MT. That is like putting logistics at the head of the priority list for Coal India, which currently may not be even in the list at all, being looked after by other Ministries and departments.

ABOUT THE AUTHOR:
Authored by Procyon Mukherjee, who is the Chief Procurement Officer in LafargeHolcim India and an industry veteran in the Supply Chain & Logistics space.

Disclaimer:
All the views expressed are his personal views and has no relation with the views of others or his own organization. All data used in the article is from Coal India website and from Elekore’s presentation – ‘India Coal Conference 2018: Insights on Coal Sector’.

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Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings

Published

3 years ago

October 21, 2021

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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).

Source:moneycontrol.com

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Wonder Cement shows journey of cement with new campaign

Published

3 years ago

October 21, 2021

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The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…

ETBrandEquity

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.

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In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)

Published

3 years ago

October 21, 2021

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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

UltraTech Cement
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.