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JUN 10 2015

Coal linkage auction: No good news for cement firms

  • Economic Times, ET Bureau / Hyderabad
  • Created: Wed 10th JUN 2015

The government's plan to have fresh auction of coal linkages for non-regulated sectors is not good news for end-user industries such as cement. Companies that depend on linkages from Coal India could see their costs go up.


Analysts at Nomura say the auctioning would mean domestic coal becoming expensive as more players will try to secure more domestic coal supplies. Currently, linkage coal is far cheaper than imported coal. Assuming auction of coal linkage happens at an import parity price, it would mean the industry's power and fuel costs would increase by 2.5 per cent.


Analysts at Edelweiss expect bidding to be aggressive. Amongst large caps, ACC that has maximum exposure to coal linkages from Coal India (45-60 per cent according to analysts) might face more heat compared to other cement companies having lower exposure.


Analysts at Nomura say ACC's power and fuel cost would increase by 5.7 per cent or its overall cost would rise by 1.7 per cent. For UltraTech, which depended more on imported coal and has been increasing use of pet coke to fulfil its energy needs, the impact on costs will be lesser. Similar is the case with Ambuja Cements. So, the rise in their overall costs would be much lesser, 0.8-0.9 per cent increase in their costs, estimate analysts.


Shree Cement did not have any exposure to coal linkages from Coal India and hence for its new capacities at Chhattisgarh the fresh auction would open an opportunity to secure linkages.


Although the amount might appear small, the impact could be higher if bidding is aggressive. Nevertheless, it is not good news given that cement players are already facing the heat on account of low demand and realisations. The share price of many cement companies has already fallen after a disappointing March 2015 quarter. The June 2015 quarter, too, has not provided any respite up till now as far as demand and realisations are concerned.


Analysts at JPMorgan say in the past five years, resilient rural markets (about 40 per cent of industry volumes) have supported overall growth amid weak infra/urban housing demand. However, unseasonal rains, muted minimum support price increases, and below-normal monsoon forecasts make this vulnerable in the near term.


The share price of cement companies is likely to remain under pressure till clarity emerges on some of the key issues.




UltraTech - Rawan Cement Works Shree Cement Ltd Coal Energy Imported Coal Import Nomura Rural Power coal linkages India

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