The coal shortage crisis and energy crunch are the biggest economic disruptions across India, China, Europe, and other countries.
The coal shortage crisis and energy crunch are the biggest economic disruptions across India, China, Europe, and other countries. As the economies were recovering from the coronavirus setback, it raised industries’ power demand which outstripped the supply of coal across the globe. If this was not enough, now the hike in the cement prices has garnered the attention of government across states. The recently formed South Indian Cement Manufacturers’ Association (SICMA) was setting up fresh concerns over rising input cost, and now the rise in cement prices is another topic of concern. As per SICMA, there was an unprecedented increase in the cost of imported coal in the past two months, with the substitute, petcoke, simply not being available. To add to this, there is a shortage of vessels, making it difficult to buy the high-priced imported coal/petcoke.
Today, India is facing two key problems– an increase in the demand for electricity and a fall in local coal production. Our nation meets around 75 per cent of its total coal demand, locally. Heavy rains led to the flooding of mines, which disrupted the main transport routes. Coal India (CIL), the world’s largest coal mining company, produces around 84 per cent of India’s thermal coal. But the company has been failing in meeting its annual production target. And the dependency on CIL was the major drawback that led to an imbalance of demand and supply. It is reported that the Indian power plants were dangerously out of coal stock, at the end of September. The coal stock fell to around 8.1 million tons, which is almost 76 per cent less than the previous year.
China’s power demand shortage reached a crisis level last month, further leading to a shortage in industrial and household use of coal. As per the CRISIL rating agency, Australian and Indonesian coal prices are expected to increase over the remaining of this fiscal year due to a high increase in demand from China and other parts of the world.
So, how does the coal crisis affect the cement industry? In the cement industry,
75 per cent of the power and fuel cost is associated with coal. Power, freight, and fuel constitute 55-60 per cent of the total cost of cement production. In October, cement companies increased the cement price by Rs 10-40 per bag, across India. According to reports, the increase in cement prices is higher in Mumbai and Gujarat region, recording a hike of Rs 40 per bag, while in North and South India, the hike is around Rs 10-20 per bag. If the situation remains the same, it may force some cement companies to reduce or shut down their operations in a few plants.
With imported coal and increased fuel prices, cost pressures will continue in the next two quarters. However, with ambitious infrastructure projects in the pipeline, there will be a good demand for cement and other building materials. With such soaring infrastructure demand, the attempt to increase cement price may be fruitful for the cement players. Now the question is–who will bear the brunt of increased coal prices and building materials? The cement companies might pass on the cost pressure to markets in the coming months and the end customer will have to bear the losses.
As per CARE Ratings, the cement production in India is expected to increase by ~4-7 per cent YoY, in FY22, driven by the government’s strong focus on infrastructure development. Cement manufacturers are optimistic that pick-up in infrastructure-led construction activity and the end of the monsoon season will drive cement demand ahead.
The government may regulate the prices in the short term, but economies will still take 4-5 months to recover from the coal crisis fully. In India, we may continue to see an increase in power outages in many parts of the country, while some cities might end up paying a premium amount to get ample power supply.
Founder & Editor-in-Chief
Pratap Padode