Energy-intensive cos feel the heat of higher coal costs

The profit margins of most energy-intensive industries such as cement, aluminium and sponge iron will come under pressure in the March quarter with Coal India implementing its new pricing policy.

Most of the company in the non-core sector have coal-based captive power plants, the fuel cost of which would rise under the new system.

For instance, power costs account for about a third of the total smelting cost of a primary aluminium producer and coal cost increase would exert pressures on its profitability of operations, said an analyst. The impact on the power sector is expected to be mixed, depending upon the grade of coal a company buys.

Coal India has divided the entire spectrum of gross calorific value (GCV) into 17 bands – starting from 2200 kilo calorie per Kg (KCal/Kg) to 7000 KCal/Kg and above, in intervals of 300 KCal/Kg as against seven grades that had existed under the previous useful heat value based pricing system.

Additionally, CIL has brought in uniformity in pricing of non-coking coal produced at different mines by its subsidiaries, as against the earlier practice of subsidiary-wise and mine-wise differential prices. Only coal produced by Eastern Coalfields would command a six per cent higher price over the rates notified for others.

“Given the shortage of coal availability most cement companies are dependent anyway on e-auction where the prices have shot up substantially. The ability to pass on the incremental cost will depend on the demand in coming months,” said a cement company official.

Despite cost pressure, major cement companies such as UltraTech Cement and Shree Cement have posted a sharp jump in profit primarily due to lower base last year. However, JSW Steel and Hindustan Zinc profitability was down due to higher cost and lower realisation.

Mr Jayanta Roy, Senior Vice-President (Corporate Ratings), ICRA, said since Coal India has a near monopoly position in the domestic coal market, with a market share of about 80 per cent, the new prices would be applicable to almost all non-coking coal consumers in the country.

CIL is currently in the process of ascertaining the GCVs of its coal produced from different collieries.

Despite substantial price hikes for some coal consumers, the possibility of grade slippages remains, in which case the extent of price rise for a particular coal mine would be moderated to an extent.

In the absence of adequate data at this stage on CIL's product mix across the new GCV bands, it is difficult to arrive at the exact impact on various coal consumers, he said.

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