Cement-Linkage auction;sentimental negative, says Edelweiss

Ministry of Coal (MoC) introduced draft guidelines for proposed auction of coal linkages to non-regulated sector (including Cement) via competitive bidding. The existing linkages will have to be surrendered on expiry or by 30th June 2016, whichever is earlier. All future linkages to the non-regulated sector will be auctioned through ‘Supplier Controlled Ascending Market Clearing Approach’ where the price will increase till demand-supply equilibrium is established. Given that the existing linkage coal price is at 30%- 50% discount to eAuction/imported coal, we expect bidding to be aggressive; thereby increasing the cost for cement companies in the range of INR30-INR90 per tonne. Highest impact will be on  ACC  (45% dependence on linkage), while there will be no impact on Shree Cement (100% petcoke). Currently, since linkage price is at 30%- 50% discount to eAuction/imported coal, we expect bidding to be aggressive. A 25% increase in linkage price, will potentially increase the cost for our coverage universe by INR30-INR90 per tonne.

To assure the bidders of price stability, the coal prices will be fixed for tenure of 5 years. While the impact for Shree Cement will be Nil as it has 100% petcoke consumption, the impact will be maximum for ACC which has 45% of linkage coal consumption.

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