The Supreme Court’s decision to lift the blanket ban on the import of pet coke and allow a capped quantity of import may create an uncertainty on the expansion of aluminium capacity and discourage investments in the sector, India Ratings said in a report Tuesday.

The apex court had earlier this month allowed an annual limit of 1.4 million tonnes and 0.5 million tonnes for the import of green pet coke (GPC) and calcined pet coke (CPC), respectively. Aluminium making needs carbon anodes, which requires CPC and coal tar pitch in the ratio of 80:20.

The rating agency said the Supreme Court’s move will affect aluminium producers’ margins in the medium term.

Negatively hit in medium term

“It will also constrain the availability of critical inputs such as calcined pet coke (CPC) especially in the context of aluminium capacity expansion. The ban has also created an uncertainty on the expansion of aluminium capacity and discourages investments in the sector,” it said.

The move is also expected to have long-term pricing pressure for aluminium producers, it added.

The agency, however, believes that the import limit covers the industry’s existing import dependencies and hence is unlikely to affect the operations substantially in the short run.

It noted that the aluminium producers may be negatively hit in the medium term, except for a timely upward revision in the import cap.

A limited supply of domestic CPC and the limit on its import may keep the prices inflated, impacting the margin of aluminium industry in the context of capacity expansion, according to the report.

On the contrary, it said that this could be beneficial for the CPC sector with a skewed demand-supply balance.

The agency estimates that for every 5 per cent rise in CPC price, the EBITDA could contract by 20-25 basis points.

CPC consumption

During FY18, the total aluminium production was around 3.3 million tonnes at a capacity utilisation level of 85 per cent. The manufacturers consumed around 1.38 million tonnes of CPC, of which about one million tonnes was supplied by domestic calciners and the rest was imported, according to Environment Pollution (Prevention & Control) Authority note.

Hence, the new import limit of 0.5 million tonnes of CPC is adequate to cover the requirement at the current utilisation levels, the report said, adding, however, the capped imports would also mean capped capacity utilisation for aluminium producers.

The rating agency estimates that aluminium producers will be able to expand their current utilisation by just 8-9 per cent in view of the import limits and assuming all of the domestically produced CPC will be made available for aluminium production.

Hence, the companies would find it increasingly difficult to expand the production lines and the ban could be even more challenging for companies which are in the middle of expanding their capacities, the report said.