Tata Sponge is likely to absorb only 10-20 percent of the added cost and the rest will passed-on to the customers, said Managing Director DP Deshpande.
In yesterday's Budget speech, the Finance Minister while renaming the Clean Energy Cess as Clean Environment Cess proposed to raise the cess on coal, lignite and peat from the current Rs 200 per tonne to Rs 400 per tonne. The coal producers are likely to pass this on to coal consumer and they in turn will pass it through higher prices of their end produces.
Tata Sponge is likely to absorb only 10-20 percent of the added cost and the rest will passed-on to the customers, said Managing Director DP Deshpande in an interview to CNBC-TV18
Currently the company consumers around 330,000 tonne of coal per annum of which maximum is imported, said Deshpande. However, even the company will have to pay the extra cess on imported coal too, he added.
Sponge iron prices had gone up substantially but since last three weeks they have again corrected, he said.
Below is the transcript of DD Deshpande’s interview with Nigel D’souza on CNBC-TV18.
Q: What exactly is your usage of coal? How much of coal do you use every year? Could you give us that number and also, could you give us a breakup of whether it is domestic coal or it is imported coal?
A: Currently Tata Sponge produces roughly about 3,90,000 tonnes of sponge iron and per tonne of sponge iron and we use about 0.85-0.9 tonnes of coal. So, that makes it about 3,20,000-3,30,000 tonnes of annual coal consumption as far as Tata Sponge is concerned. We get all our coal imported. 95 percent of it is imported. But in this Budget, imported or domestic coal is not making any difference. The entire 3,30,000 tonnes of purchases of coal is going to get additionally taxed by Rs 200 and that is something which is directly hit on to the sponge iron profitability at the moment. Because it is industry wide, everyone has to pay. My take is that you will be able to pass it on to the customers and eventually the steel customers will pay for it.
Q: If you using around Rs 3,20,000 tonnes of coal a year, that would accrete roughly around Rs 6.5 crore and if I look at your nine month earnings before interest, taxes, depreciation and amortisation (EBITDA) numbers that is only around Rs 8 crore. So, on a yearly basis, it looks like a fairly large impact because you are breaking even at the operating level itself, so what exactly can you see in terms of the impact for the next financial year? FY17, what is your targeted EBITDA and could you tell us what percentage will this Rs 6.5 crore be of that?
A: EBITDA level of eight crore was a transient EBITDA last year because the sponge iron prices had fallen and the raw material prices were not falling as fast. Now the situation has come towards certain amount of stability. So, EBITDA will not be hit, plus the EBITDA will be slightly high. So, we do not foresee a great problem in terms of maintaining high EBITDA, the EBITDA gets cut to the extent of 6.5 crore.
Q: You were indicating that you were going to look to pass on this particular impact, do you think that in fact, will that be likely or do you think that given the kind of demand scenario that we are in, it is unlikely that it can pass through.
A: The ability of the sponge iron industry to absorb the entire amount is not there, actually speaking. You just now mentioned our last year’s performance for Tata Sponge was only Rs eight crore EBITDA. So, most of the people are in a similar situation. So, we will not be able to absorb it. Maybe we will be able to absorb 10-20 percent of it. Most probably we will be able to pass it on to the customers.
Q: Could you tell us what exactly is the current uptick in sponge iron prices, we have seen in the last couple of weeks, given that we have the minimum import price (MIP) that has come in. Have prices gone up and could you tell us by how much?
A: After the MIP declaration, the prices did go up substantially. There were corrections which were required very badly by the industry and it actually got corrected, but after the three weeks I would say, the effect of MIP is now slightly getting eroded. The market is getting stabilised at a slightly lower level and we thought the stable point is there. So, the prices went up to about Rs 13,000 a tonne and again has come back to Rs 12,000 a tonne.
Q: So, the increase was around Rs 1,000-1,500 per tonne?
A: Increase was around Rs 2,500, skipped back around Rs 1,000, so our net increase is about Rs 1,500.