India’s Cement Industry reeling under the premier challenge of Coal supply
Despite being the second largest cement producing country in the world and sitting atop world’s fifth largest coal reserves, the Indian cement industry is facing the heat of shortage in domestic coal supplies. To highlight this, the supply of coal through linkage from coal companies to the cement companies has decreased from 70% of total requirement in 2003-04 to less than 50% in 2008-09. The fuel situation has worsened further by the end of 2012 entailing a spike of 15% in freight cost coming in back drop of higher diesel prices. The situation becomes alarming with the Cement producers looming under squeezed profit margins affected by raw material movement, coal supplies and distribution. Further the development of cancellation of a number of coal blocks held by three cement companies after the recommendation of inter-ministerial panel the concerns of securing coal supply to cement industry in India are further highlighted.
Understanding the Cement Industry Structure in India
The Indian Cement industry comprised of 183 large cement plants and more than 360 mini cement plants in FY 2012-13. The industry is identified by “Cartel” wherein the top five players contribute nearly 50% of the industry capacity.
The Indian cement industry is also characterized by its regional segmentation into Northern, Central, Eastern, Western and Southern regions (Refer Exhibit 01). The split among regions in India is at large attributed to the fact that cement is bulk item and transporting it over long distances may prove uneconomical as the freight cost is high. Thus, cement industry can be attributed as freight intensive and dominantly domestically driven with exports reducing to negligible proportions. On the national level top 12 firms capitalise on 70% of total cement production in India. This nature is almost consistent with little variation in production pattern of the top firms from FY 2006 to FY 2012.
Indian Cement Industry’s Dependence on Coal- A Reality Check
The cement industry in India depends heavily on coal for manufacturing cement and accounts for usage of 5% coal produced in the country. Therefore, adequate and sustained availability of proper quality of coal is of paramount importance for the Indian cement industry. In the current fiscal the cement industry in India has a coal demand close to 64 MT as per the enincon’s analysis of coal demand in India vis-à-vis cement production (Refer Exhibit 02). The Government of India and CMA decide upon the coal allocation for the cement manufacturing industries the quantities are fixed basis the likely cement production and past performance of the concerned cement producing unit. Coal India Ltd. (CIL) and Singareni Colleries Co. Ltd. (SCCL) are the two indigenous coal suppliers for the cement industry through the system of linkage and Fuel Supply Agreement (FSA). However, the supplies are grossly inadequate from CIL and SCCL meeting 48% of the total demand of 29 MT with supplies of merely 14.29 MT in 2008-09. The additional requirement of 15.28 MT had to be procured at a huge cost from various other sources like purchase from open market, imports, use of pet coke etc. to supplement the requirement.
Apart from this with greater distance and inadequate railway network major chunk of cement manufacturing units have to rely upon roadways to transport coal, which causes unnecessary delays as well. So the cement plants located in coastal areas prefer imported coal rather than the domestic as it saves upon the cost overruns due to improvement of efficiency in cement production, better quality coal demand is on rise from the industry and hence the tune of imports have gone up by nearly double in last five years (Refer Exhibit 03). In FY 2012-13, 11 per cent of total demand of coal by cement industry is being fulfilled through imports. The main source of coal imports for India’s cement industry are South Africa and Indonesia. While the domestic availability of coal comprises of non coking coal and middlings of coking coal washeries as feed to derive heat required in cement production with preferred range of GCV is 3800-5600 Kcal/Kg (Refer Exhibit 04).
Demand Supply Dynamics Outlook for Indian Cement Industry
The cement industry growth has declined from an average of 10 per cent per annum from 2006-07 to 2012-13 to around 6-7 per cent owing to slowed demand and coal supply shortages. Consequently, the share of imports in coal supplies to cement industry has increased from around 4-5 per cent to 10 percent during the same period. Further a substantial Brownfield/Greenfield capacities that have been created over the last 3-4 years are lying idle without coal supply from the coal companies, obliging them to source their entire fuel requirement from various other avenues. Thus there has been low capacity utilisation of the cement industry in India. However with growing impetus on infrastructure development of the country by the government as per enincon’s analysis, the cement production capacities is likely to grow at a CAGR of 6.2 % to reach 324 MT by the end of 12th FYP (Refer Exhibit 05). Following the similar trend the demand of coal will also rise in the same proportions for the cement industry to reach 81 MT by the end of 12th FYP ( Refer Exhibit 06). This likely increase in coal demand has a significant share being sufficed by imported coal supplies as the availability of indigenous coal o cement industry is also not assured as the quantum is not fixed. However owing to lack of import infrastructure the large scale imports of coal cement industry will be a challenge in upcoming FYP. Thus there lies significant supply side challenges with coal supplies to cement industry.
Likely Coal Supply Side Challenges for Cement Industry in India
The cement sector in India faces major challenge of infrastructure whether the coal is sourced domestically or is imported. The issues likely to impact coal supply for the cement sector in future given the current scenario can be listed as under:-
Lack of Domestic Coal Transport Infrastructure:
The cement production players are facing this as the biggest challenge as most of the coals reaching cement plants from domestic sources are via road transport. This is so because the majority of freight services offered by Indian railways are availed by power plants. The transport of coal through road not only leads to inevitable delays but also unnecessary project over runs which are affecting cement manufacturers efficiency of production.
Stranded Reserves of Domestic Coal due to Improper Utilisation:
The inability to mine coal from allocated coal blocks and even starting production leading to de-allocation of blocks will see cement industry in shortage of domestic coal, thereby forced to import more coal.
Inadequate Import Infrastructure:
In the event of increasing dependence on imports which is most likely to continue for cement sector, this will pose as major challenge. The import infrastructure of the country is unable to match pace with growing need of imports and hence this inadequacy may see coastal cement plants relying on imported coal suffering with uneven coal supplies.
Struggling with the challenges coal sourcing the cement producing companies need to look out coal sourcing options and models ( refer Exhibit 07) in order to secure fuel supplies for their existing as well as upcoming production facilities.