In our second episode of The Petcoke Podcast, Argus’ Ajay Modi speaks with Surinder Gupta, a senior consultant for the Indian cement sector, about recent developments in petroleum coke demand from this key sector.
They discuss hot topics including the impact of Covid-19, domestic and imported supply, coke v coal competitiveness and the future view on Indian demand.
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Ajay: Hello and welcome to the "Petcoke Podcast." In this series, we will be speaking with key industry participants to gain their insight into the latest trends for petroleum coke markets around the world. In today's episode, we will be discussing the Indian cement market, how COVID-19 has impacted output, and what it means for the petcoke demand. The "Petcoke Podcast" is brought to you by Argus Media, a leading independent provider of energy and commodity pricing information. My name is Ajay Modi. I'm a senior reporter covering petcoke for Argus from Singapore. With me today is Mr. Surinder Gupta, a senior consultant for the Indian cement sector. Mr. Gupta, welcome to this Argus podcast.
Surinder: Thank you, Ajay.
Ajay: We start with the obvious topic of how COVID-19 has impacted the cement sector. The Indian cement output contracted by over 20% in May from a year earlier after the 90% decline in April following the lockdown at the end of March. Although capacity has been gradually returning, output still seems significantly lower than historical norms. How has this affected petcoke demand in your view?
Surinder: See, it was very heartening that in the month of May we had done around 78% of last year's numbers, and this gives us an insight that going forward we can further scale up the production because the demand has started picking up. We have already done 113.5mn tons in the first five months of CY '20. And even if we do 90% of the June-December '19, we will touch around 285 million. And if we are able to manage 100% of the last six months of June-December, we will touch around 300 million. Now, with this 300 million, there will be enough demand of petcoke, and we can touch around 10-10.5 million tons of petcoke imports as against 10.8 million last year.
Ajay: Do you notice any regional differences in terms of how the country has got impacted due to COVID-19?
Surinder: See, while there has been maximum cases of COVID in a city like Bombay, then followed by Chennai, followed by Delhi, but one thing on the positive side is the cement plants are spread across all Maharashtra, and at quite a few places, the situation is very comfortable, so is the case where Chennai is having almost about 70%-75% of the total cases in Tamil Nadu. So is... The third hotspot is Delhi, and not more than 6% to 7% capacity is there around Delhi. But with these numbers, the spread is uniform and the production is picking up at almost all the plants. So, this major COVID impact has not been there on the production of cement as far as regional differences are concerned.
Ajay: Domestic refiners including Reliance and Nayara had to look at avenues to export coke during the lockdown. What has been the balance of demand between domestic coke and seaborne imports?
Surinder: See, domestic production has been around 13.5 to 14 million tons, of which about 0.5 is anode grade coke. And exports are normally in the range of 4.6 to 1 million tons, so about 12.5 million tons is available for the domestic consumption normally. And if you knock off around 3 million tons of Reliance, which they have used for the captive consumption for 120 odd days of gasifiers, which were run during CY '20, almost about 9-9.5 million tons of petcoke is available from the domestic market.
And looking at the requirement, we can safely presume around 10 million will be through imports. That will be the normal supply-demand balance between the domestic production and the seaborne imports. [crosstalk 00:05:02] Looking forward, we need to understand one thing more that the Indian refineries are in their ramp-up mode, and by 2035, the demand of petroleum products will go up so will be the refining capacity. And we can hope to add another 6.5 million tons of petcoke in the next five years from the refinery expansion and greenfield refineries.
Ajay: Reliance has been talking about further ramping up operations at its gasifiers in the current fiscal year. Do you think it will impact the domestic availability of petcoke in any manner?
Surinder: See, with 10 gasifiers of Reliance, you know, if they run continuously, they can consume around 2,900 tons per day of petcoke per gasifier. But ultimately, they are looking to replace the import of LNG. Now, that being the case, current prices of LNG are in the range of around $2-$2.2 per million Btu as against last year October '19 when the prices were about $6.8 per million Btu. In the present circumstances, I do not foresee that Reliance will use all their gasifiers. Maybe they will keep the gasifiers in the state of readiness, and if LNG prices go up, they may use gasifiers to an extent.
Ajay: Petcoke initially lost some competitiveness compared with coal in April, and then coke discounts to Richards Bay Coal returned to around 20% in May, but the discount has steadily eroded in June, and coke is now about on par with the 6000 kcal grade and even more costly than a number of coal origins. What are cement makers factoring in their decisions about whether to procure coal or petcoke?
Surinder: See, like any other industry, Indian cement industry is highly price-sensitive, and the cost of the raw material plays a key role. And going forward, we need to understand that the domestic coal producer, Coal India Limited, is sitting on an inventory of about 75 million tons of coal, and they are putting their best efforts to attract more and more lifting from the cement players. Now, as against the normal, about 7-7.5 million tons, which they have been supplying for the last four years, they are in touch with the major cement players as to what can be done to give them high CV coal, give them better rates, give them third-party independent testing, and also the price competitiveness compared to imports, there is a possibility that more of domestic coal may be used. And petcoke since it has to be disposed off by the domestic refiners vis-a-vis exports, they may adjust the prices of petcoke accordingly. So, the import of petcoke may get impacted unless the prices are corrected accordingly.
Ajay: India cement industry had plans to add significant new capacities during the 2020 calendar year, but we understand that all of these plans have been put on hold. When do you think the industry will start adding new capacities, or do you think that there could be longer-term effects on the Indian cement market and some of these plans could be abandoned?
Surinder: See, the current Indian capacity is 540 million tons as of 31st March '19. And India is world number two producer with 8% global installed capacity, but the silver lining is that per capita consumption of cement is 235 kg against the global average of 520. So, there's a huge potential to increase the consumption. And there has been a serious thrust by the current government, like 40 kilometers of highways per day for next five years, Indian Railway Vision 2025 where 25,000 kilometers new lines are being added, adding new 50 airports, 2 crore houses, massive rural road upgradation, unlocking the potential of waterways and coastlines, and putting some ultra mega power projects into place. So, this will put a lot of demand for the cement. As we know, cement demand is in the housing sector, that is real estate, which is around 65%, infrastructure about 20%, and industry which is around 15%. So, everywhere, there will be demand and there will be a push for petcoke requirement as well.
Ajay: India's coke imports were initially projected to grow to as high as 14 million ton during the 2020 calendar year, which would have exceeded the record-setting 13.8 million ton in 2016. But in the first five months of the year, imports are only around 4.6 million ton, below the same period in 2019. What do you expect overall 2020 coke imports will be?
Surinder: See, I look at it...because even if you make around 300 million tons of cement, and going by the current norms, we may require around 18.5 million tons of petcoke for the kiln operations and captive power plants will continue to run on coal, it could be domestic coal, it could be imported coal. So, going forward, if the demand is around 18.5 million tons for the kiln operations, presuming that 80% of this is met through petcoke, we need about 16-16.5 million tons of petcoke. And the domestic availability will also be curtailed from an average of 13.5 to around 12 million tons because of reduced refinery throughput in the month of March, April, and May because of reduced demand of the petrol, diesel, and aviation fuels.
And presuming that Reliance's own use requirement is around 3 million and domestic availability is around 12 million, the net domestic availability is around 9 million. So, we will still need about 9 million tons of petcoke, and we have imported only around 4.6 in the first five months. So, going forward, we see another 5-5.5 million tons of petcoke imports may be there, which will make it total to about 10 million tons as against 10.8 in CY '19. But we certainly do not look at exceeding 13.8 million tons which were imported in 2016.
Ajay: We have reached the end of this discussion. Thank you for your valuable inputs, Mr. Gupta.
Surinder: Thank you very much.
Ajay: And if you enjoyed this podcast, please be sure to tune in for the other episodes in our series, the "Petcoke Podcast."