Update on Petcoke Ban for Rain Industries Ltd.

We have been getting queries from many people after the notification issued by the government on banning the use of Petcoke and there are many messages floating around various circles regarding the same. Many people are not sure how would it affect the business of Rain Industries Ltd.

We would try to throw some light on the issue as we have been in touch with many industry experts including Petcoke importers, Calciners and aluminum plants.

Firstly, we would like to bring to your notice that the matter is not new which is being discussed and the ban was already announced by the Honorable Supreme Court wide its order dated 26^th July, 2018. The implication of the same was explained by the company in detail in its Concall and the same was highlighted by us in our update of the quarterly numbers.

The management of the company on the call had highlighted that they already have 3 months inventory of the raw material. It also mentioned that it expects a favorable order soon as not allowing imports can disrupt the whole value chain of aluminum in our country including the production of the government of India undertaking, Nalco Ltd.  The loss to the smelters and the government would be much larger in quantum than to the Calciners like Rain who also have global operations and India business would be contributing just 15 % to their profits.

 The following is our understanding of the matter:

• The court in its order had intended to ban use of Petcoke as a fuel and not as a feedstock. Rain uses anode grade Petcoke as a feedstock only and not as a fuel.
• The court has set a deadline for representation to be made and studies to be made and would be deciding on the matter by 1^st October, 2018. Given the stakes involved of the aluminum industry and that of the undertaking of the government enterprise itself i.e Nalco ltd, it seems less likely that the court would decide otherwise and Rain has sufficient quantum of material available till that time.
• Rain Industries has already made a representation by its lawyers and the next hearing is scheduled on 22^nd August,2018
• People in the industry say that the refiners in India are not capable of producing anode grade coke and 95 % of the anode grade coke required by Indian aluminum smelters is imported hence there is no alternative to import.
• Aluminum smelting cannot happen without use of anodes, which use Calcined Petcoke as a raw material. Hence, there is no alternative to manufacture aluminum without the use of anodes, which require Calcined pet coke.
• Companies like Rain still have global operations hence the impact would be in the range of 12% to 15% of their profits in extreme situation versus the other Calciners who have just Indian operations. Their whole business would go for a toss if the ban were to be permanent.
• Rain has 3 months of inventory already available at its plants as was highlighted by the company in its Concall.
• Rain facility is state of the art facility in Vizag with a Zero discharge plant and having fully compliant environmental practices, hence it has the strongest case in the industry to get the permission.

In our understanding of the whole situation the following are the risks and opportunities emanating from the current situation:

Risks

1. The Government doesn’t allow the imports even after representation.

The chances of such an outcome are almost close to negligible, as it would disrupt the whole aluminum manufacturing industry in India.

2. The Government takes much longer time than 3 months to give approval.

In this scenario, the Calciners including Rain Industries start to suffer as their production starts taking a hit and their short term profitability gets impacted.

3. The Government allows the aluminum smelters to import CPC directly from China and other countries to survive :

Such a decision would make the whole Calcining industry to shut down and create a dependence on foreign imports completely of a commodity which is very important for the aluminum industry. Given the stance of the government in fact to impose anti-dumping duties and discourage imports it’s really tough to believe why would it want to encourage imports in this case where the Calciners are not even using petcoke as a fuel which is the major concern of the government and the Supreme Court.

Opportunities:

1. The government sets norms of importing and stricter compliance:

This can emerge as a big long term opportunity for Rain as it being the leader and already compliant as per the global standards, it would be able to gain market share as many small Calciners would not be able to comply or they would be required to install pollution control equipments at their plant hence increasing their CAPEX and OPEX which Rain doesn’t need to as it already has that. Also the upcoming new plant of Rain next year would get higher utilization rates very soon due to such a development.

2. This move may even trigger consolidation in the industry :

Already struggling with high working capital requirements and unavailability of calcinable petroleum coke, the small players might be further discouraged to continue operating by themselves in a tough regulated environment; instead they may decide to merge with bigger Calciners.

3. The prices of CPC may shoot up in the short term :

As the ban on imports creates a short supply but bigger Calciners like Rain and Goa Carbon have few months of inventory on their hand and they might benefit from the short supply. The ability to do that would be limited as most of them have medium term contracts due to which they would not be able to change the prices abruptly.

All in all our assessment is that the only concern is the timing of the allowance by the Court on the subject matter and the norms which are fixed by the government for the same rather than weather the imports would be allowed all together or not.