Coal linkage auction: Sentimentally negative for cement players

The fresh auction of coal linkages for non-regulated sectors is not good news for industries such as the sector.Coal is a major raw material for the cement industry and companies that depend on linkages from will see their costs going up.

Analysts at Nomura say that auctioning of coal linkages would mean domestic coal would become expensive as players will try to secure more domestic coal supplies. Assuming auction of coal linkage happens at an import parity price, it would mean the industry’s power and fuel costs would increase by around 2.5%, add analysts.

Analysts at Edelweiss say that currently, since linkage price is at 30-50% discount to auction/imported coal, they expect bidding to be aggressive. A 25% increase in linkage price, will potentially increase the cost for their coverage universe of companies by Rs 30-90 per tonne. This translates to an increase of Rs 1.5-4.5 per bag of cement.

Though it is a small amount, it is not good news given that cement players are already facing the heat on account of low demand and realisations. Not surprisingly share price of many cement companies have fallen post a disappointing March 2015 quarter.

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