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• Power-intensive industries, which use higher grades of coal, will face increased power and fuel costsCoal India Ltd’s (CIL) new pricing policy has come as a shock for user industries. The notified price of domestic coal will now be linked to its grade based on gross calorific value. In the earlier system, the notified price was based on useful heat value.The shift to a new pricing mechanism means that power-intensive industries, which use higher grades of coal, will now face increased power and fuel costs. It also widens the range of grades from seven to 17.

• Cement makers are likely to be the worst-hit because these firms source between 50-70% of their coal requirements from CIL. One, high-grade coal is needed to fire the kiln. Two, for cement firms that have captive power units relying on coal, albeit a blend of domestic and imported coal, power and fuel costs together account for nearly one-third of a company’s cost of producing cement. A Nomura Securities Co. Ltd report estimates that on a blended basis, the input cost for cement manufacturers could rise by Rs 190-232 per tonne, impacting estimated Ebitda/tonne by 18-29%, without any corresponding product price increase. Ebitda refers to earnings before interest, taxes, depreciation and amortization.

• Likewise, the new pricing could also impact the profitability of other power-intensive sectors. For example, input costs would go up for metal producers. An Edelweiss Securities Ltd report points out that the blended increase in coal price for non-power (not power generating) users could be around 19% from earlier levels.The only way to negate this impact would be to increase product prices. But this may be tough for now, given the sombre economic milieu. Metal prices are on a downtrend. Cement prices can only increase gradually when there is a fillip in infrastructure investment across the country. On the contrary, dealers say cement prices have been softer in January than in December.

• In fact, the December quarter is estimated to record higher power and fuel costs because of the impact of the rupee depreciation on imported coal and higher e-auction prices in the domestic market. Operating profit for the quarter, however, may be higher than in the year-ago period, on a lower base.More importantly, the power sector, which is already reeling under poor merchant power tariffs and shortage of coal, would also be hit by the new pricing policy. Although the exact impact would depend on grades used by power producers, analysts estimate that the blended increase in coal price could be around 2%.

• That said, independent power producers having a revenue model that allows for cost escalation (with pass-through clause) will be relatively better off than those not having one.Of course, one would have to wait for the March quarter earnings to ascertain the exact impact on various industrial sectors. However, the move is certainly untimely, given that there were two price revisions within a year (the previous one being in March 2011), especially when India’s core sectors are already reeling under slowing growth rates, cost pressures and margin squeeze.

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