The Supreme Court has ordered to ban the use of Pet coke and furnace oil as a fuel in the National Capital Region and in the States of Rajasthan, Haryana and Uttar Pradesh for any industry. The ban is expected to have impact on the industrial users of Pet coke in and around this region. The cement, power and steel industries are the predominant users of pet coke. The cement industry is the largest consumer of Pet coke, accounting for a consumption of around 75 per cent of the total demand in the country.
The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70 per cent of the total cement production of the country. A total of 188 large cement plants together account for 97 per cent of the total installed capacity in the country, with 365 small plants account for the rest. Of these large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. Of the three, the state of Rajasthan is significant from the perspective of cement production. It accounts for 12% of the country’s overall limestone reserves, hence several integrated/clinkerisation units are situated there.
Manufacturing of cement requires heavy, low value and weight loosing materials and is primarily a raw material oriented industry. Limestone is the main raw material and comprises 60-65 per cent of the total product. On an average 1.5 tonnes of limestone are required to produce one tonne of cement. Hence, the location of a cement plant is based on the limestone deposits.
Pet coke is primarily used as a fuel in the manufacturing process of cement. Pet coke is solid carbonaceous residue produced by thermal decomposition of heavy petroleum fractions. It is used as a fuel for the cement industry and for power generating units. In comparison to Indian coal which is being made available to cement plants, pet coke either local or imported is better in properties as a fuel. It has high calorific value (around 8,000 Kcal/kg) compared to 3,500-4,500 kcal/kg of conventional Indian coal.
In other properties like ash content and volatile matter it has been found to be superior. The negative point is the sulphur content, which goes up to 7 per cent. The sulphur content varies depending on the source of crude oil. For example, the pet coke available in Assam and in Gujarat will vary in sulphur content.
On an average, more than 70% of the fuel requirement of cement makers is met through petcoke. Petcoke usage in India posted a compounded annual growth rate of 24% over fiscal years 2013 to 2017. Cement manufacturers in the regions of NCR, Uttar Pradesh, Rajasthan and Haryana would have to migrate to alternative fuels which would take a toll on their profitability as compared to companies in the other regions. The rise in fuel costs would reduce their EBITDA margins to some extent if companies are unable to pass on the increase in prices to the end consumers.
Petcoke usage is the highest amongst all the northern players like Shree Cement, JK Lakshmi Cement Ltd. and Mangalam Cement Ltd. Shree Cement uses 100 percent petcoke for all its cement and power plants.
Pricing power is of utmost importance in the Cement industry as it leads to a higher market share for lower priced cement if the quality is not compromised. But as the cement industry remains closer to the user industries in any of the North, South, East and West region of India cement prices per bag would have to be eventually increased in the banned regions to accommodate the use of alternative fuel due to the ban on pet coke as a fuel. The rise in prices would be proportionate to the price differential of the alternative fuel. As long as the demand for cement remains good, the players would be in a position to take decisions on price increases which is why it becomes a region-specific play.
The alternative fuel could be Coal or natural gas but the closest in terms of price and economics is the usage of coal. If high quality coal is not available in India then it would need to be imported from other countries as managing costs would be the first priority for cement companies.
Eventually the ban would be implemented on a pan India basis as the Supreme Court has suggested other States to follow the same. Cement manufacturers in the other regions would anyways have to shift to the alternate sources of fuel in the long run to accept the inevitable. The competitive cost advantage for players in the other regions would not remain for a long time to come. Temporarily, other region specific companies might witness lower price for pet coke as they would slide due to no demand from North based players.