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The impact of rising coal prices

Published

6 years ago

January 5, 2019

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Imported coal prices have been on the declining trend for the last three months and have come off almost $25 since January and about $35 from the peak levels in July/August 2018, says ES Reddy.

Coal is one of the most important primary fossil fuels and is regarded as black gold. It is a necessary evil you cannot avoid, despite being the chief pollutant, and it contributes to more than two-third of source of energy in India. The article discusses about steam coal or thermal coal only and has left out coking coal/PCI coal, which are used in sponge iron/steel industries.

Chiefly, coal is classified into four categories based on the carbon content: Anthracite contains 80-95 per cent of carbon with very high calorific value of heat value,bituminous coal contains 55-80 per cent of carbon content with medium to high calorific heat value,lignite, which is brown in colour, contains 40-55 per cent of carbon content and low calorific heat value, and peat has less than 40 per cent carbon content and hence very low heat value. Anthracite is available in very small quantities in Jammu and Kashmir. However, India has fifth largest coal reserves in the world of 280 billion tonnes of steam coal besides 44 billion tonnes of lignite as per the Geological survey of India as on April 1, 2017 in proved, indicated and inferred reserves. In terms of production, India stands as the fourth highest coal producing country in the world behind China, USA and Australia.

Australian production depends primarily on exports while for India, it is mainly for domestic consumption. As the global markets for coal are either stagnated or shrinking, Australian coal exports will stagnate or shrink while Indian domestic market being robust and growing at healthy rate, India will soon replace Australia as the third largest producer of coal.

Domestic coal production & despatch trends
Coal mining in India began in 1774 with East India Company indulging in commercial exploitation but the demand for coal started picking up with introduction of steam locomotives in the year 1853. Coal production rose to 33 MT by the beginning of first five-year plan. The National Coal Development Corporation was established in the year 1956 with the aim of increasing coal production in a systematic manner. Coal mines were nationalised on May 1, 1973 with the introduction of Coal Mines (Nationalisation) Act 1973, which is repealed by the current government on January 8, 2018 allowing private players in cement, steel, power and aluminium to mine coal for captive use in their plants.

Estimated production in 2018-19 is expected to clock in 7 per cent growth to touch 737 MT from 688 MT in the previous financial year.

Currently, only 65 per cent of coal is evacuated by rail. In order to achieve the ambitious target of one billion tonne target set by the government, development of railway lines in some of the mine clusters to support coal evacuation of another 350 million per annum is essential. Fourteen critical rail projects, which will impact coal evacuation, are being monitored at the PMO level for early completion. One of the projects-Jharsuguda-Barpalli-Sardega line?has been commissioned a few months ago and another Tori-Shivpuri line has been commissioned partially, and the balance is to be commissioned anytime soon. These two lines can potentially enhance the coal evacuation by 100 MT in Odisha and Jharkhand.

Progress in other rail projects has been limited and pose a great challenge for the aspirational goal of achieving 1 BT coal production.

E-auction
E-auction is a transparent system for procurement of coal by any company that do not have linkage or have unmet demand from the linkage. It provides an equal opportunity to all customers for procuring coal of their choice of source, grade, size/mode. Any company can participate in e-auction directly if its annual requirement is over 4,200 tonne. Otherwise it has to procure coal from a State-nominated agency at a price not more than 105 per cent of the base price purchased by the agency. Any buyer can procure coal from spot e-auction but only actual consumer can participate in forward e-auction.

CIL earmarks 10 per cent of its production for e-auction and the service providers for e-auction are MJunction and MSTC. E-auction has proved to be a mutually beneficial option for both CIL and the end users.

Premia paid for e-auction coal has gone through the roof as CIL has offered reduced quantity of 69.19 MT in April 2018 – February 2019 as against 91.79 MT offered in during the same period in the last financial year.

Spot auction premia have reached 102 per cent in September 2018 surpassing the level of 95 per cent reached during October 2017 due to tightness in domestic coal availability coupled with healthy demand from the coal consuming sectors as per ICRA.

Thermal coal imports
Domestic coal supply is inadequate compared to demand from coal consuming industries due to strong power demand, lower hydropower generation in the current financial year as well as healthy growth in production in core sectors like cement and aluminium.

Import of coal has been on the rising trend since domestic coal production has not been able to keep pace with the demand. After some spike in 2014-15, demand has corrected significantly during 2015 through 2017, due to Government’s directive to central and state government power plants to stop coal imports. Imports are on the growth path again since the unmet demand could not be met from domestic coal due to infrastructural bottlenecks.

Country-wise imports
It can be observed from the above that thermal coal is primarily imported from Indonesia, South Africa, USA and Australia. Indonesia is the dominant player in imported coal market, primarily because most of the IPPs in India are designed based on low rank Indonesia coal.

One significant development in March 2019 imports was that of China imports into India of 1.57 MT. It has to be seen whether it is a blip or China is going to be a long-term player in the Indian market. Imports have been increasing significantly from Indonesia. On the other hand, there is a decline in imports from USA since demand for thermal coal from domestic industry in the US is robust and fetch higher realisation. Mozambique imports are purely on opportunistic basis, price alone being the criteria, and it is by and large an insignificant player because Mozambique coal does not suit most of the IPPs technically.

Global prices
Factors that impact costs of importers:
FOB price
Ocean freight
Forex conversion rates (Dollar to INR)
Imported coal prices have been on the declining trend for the last three months and have come off almost $25 since January and about $35 from the peak levels in July/August 2018. Chinese restrictions in the form of stringent customs clearances for Australian coal and low demand in Europe have contributed to the tremendous fall in the prices across.

Besides, China always plays the role of a balancing factor in imported coal prices. As per some of the latest reports, China is ramping up production and may become self sufficient in coal requirement like they did in the year 2015. This will affect exports of high ash 5500 NAR coal out of Australia since most of this coal is procured by China. Rupee had roller coaster ride throughout the year climbing up to 74.3585 on October 10, 2018, from 65.2497 on April 16, 2018, an increase of 13.92 per cent before becoming strong subsequently. Rupee depreciation at 69.4122 as on April 15, 2019 is 6.34 per cent in the last one year.

Global Price Forecast
Notwithstanding the forecasts, prices are highly volatile due to various reasons like demand from the major markets and weather/infrastructure related problems of the exporting country besides variation in prices of alternative energy resources or renewable energy outputs. China continues to play a dominating role in determining the global prices by ramping up production to be self sufficient, at will.

Arbitrage advantages: Because of the above factors, the prices of coal from different countries become cheaper compared to others at different times. The window of opportunity is generally very short and an astute company leverages the arbitrage advantage effectively for cost optimisation. Arbitrage advantage can be taken only if the end Users with flexibility to burn any type of coal including pet coke and keeping track of global coal prices can avail such opportunities and enjoy cost advantage over others.

Hedging options: Companies, which depend upon imported coal, can insulate themselves against coal price volatility partly with short term or long term hedging options. Long term hedging options can be used keeping domestic price parity or price attractiveness. Indexes available for hedging freely are API4 (RSA coal), API2 (Colombian coal) and NewC (Australian coal); all basis 6000 NAR. Other indexes which do not have high liquidity but possible are ICI4 or M42 (Indonesia 4200 GAR).

Tools available for hedging:
-Pure Swaps
-Call options (capping the price at top)
-Put options (floor)
-Call and put options (cap and floor) including zero cost collar
-Other exotic options
MCX in India is working out details to register with SEBI for creating a trading platform for hedging of 4200 GAR coal price basis CFR Krishnapatnam in INR on cash settlement basis with a window of three months hedging. This hedging option should be [hopefully] available by the end of the calendar year.

About the author
ES Reddy has an extensive pan India experience in leading cement, float glass and imported coal industries in marketing and logistics. Currently, he is working as a Director with UniCoal Resources Pvt Ltd, which works as independent consultants in the field of supply, hedging and financing of imported coal. He can be reached at es.reddy@unicoalresources.com

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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

admin

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.