FREE

Event update: Home Improvement - NGT bans all coal gasifiers in Morbi: Could accelerate the formalization of tiles space!

Event

The National Green Tribunal (NGT), has ordered the shutdown of all ceramic units in the Morbi-Wankaner tiles cluster in Gujarat that are fuelled by coal-based gasifiers (Type A/B/C/D/E). The order states that only those units which are fuelled by ‘non-coal gasifiers’ or PNG or “technology consistent with the above report” (details inside) would be henceforth allowed to operate in this particular region. ().

Current status of Morbi tiles cluster

Morbi-Wankaner currently is home to ~800 manufacturing units (majorly in tiles and sanitaryware) of which an estimated 550 are running on coal gasifiers. As per a GPCB survey (conducted in May 2018), out of a total 432 tiles manufacturing units in this particular belt, only 21 units used PNG, while the balance 411 had coal-based gasifiers. Out of these 411 units, 384 units had the Type B gasifier installed (of which 254 were operational as on the survey date). The survey also mentioned that out of the total 432 industrial units in the region that used coal gasifiers, 393 also had a PNG connection.

Our view

Although this tug of war between the government and unorganized tile players is being played out for a while now, there is no doubt that implementation of this order would be beneficial for organized tiles players in general given (1) cost structure for unorganized players would rise (coal is ~20-30% cheaper versus gas), (2) working capital for unorganised players would rise further (coal credit period is ~2-3 months versus that of gas which is ~2 weeks at best) and (3) tax compliance should also improve given that coal to a great extent is sourced in cash and is a big reason for Morbi players to use it (apart from cost arbitrage). As per our discussions with industry participants, the unorganized tiles players are already running at wafer-thin margins at best and are already stretched in terms of leverage.

Given the weakness in the real estate industry (which drives most of Morbi’s domestic demand), we believe that the scope for absorbing these cost increases is negligible for unorganized players. Our discussions with industry participants suggest that unorganized players may have to hike prices by 8-10% to pass on the increased fuel costs, which would bridge the gap further between them and organized players (currently estimated at 30-35%) and will in turn help the organised players. 

Do note that organized players like Kajaria Ceramics (KJC) and Somany Ceramics (SOMC) use coal-based gasifiers in some of their production processes and possibly procure low-value products from units which may be using the same. However, both have a much stronger capacity to absorb any costs that they may incur as they shift completely in favour of gas. While the long-term thesis of organized players increasing market-share would continue to be gradually played out, the NGT order would ensure  that price aggression from unorganized players subsides and might help the industry attain some pricing power (as cost advantage of unorganised players is completely lost) in the medium-term.

We retain our Outperformer rating on KJC and Neutral rating on SOMC and as of now are not changing estimates as we expect the unorganised players to approach the Supreme Court for a relief. We believe that the SC would mostly concur with the NGT’s views and this order might go a long way in accelerating the formalisation of the tiles space.

Key highlights of the NGT Order

• PNG over coal gasifiers: All coal gasifiers (Type A/B/C/D/E) have been deemed non-viable given their impact on the environment of the Morbi-Wankaner industrial cluster. No leeway provided to ‘lower polluting’ gasifiers like Type E, given that the cumulative impact of all units shifting to this type would continue to be harmful for the local environment. Ceramic industry units would be permitted to continue their operations if they adopt piped natural gas (PNG) (given that most units have PNG connections already) until such time till a cleaner technology for synthetic gas generation is demonstrated.
• Reason for coal gasifier ban: Coal gasification produces waste which is highly carcinogenic (Morbi’s daily coal tar generation estimated at ~800,000 kg/day) and is a cause for lung cancer. Coal tar and condensate wastewater generated during the process is also causing air and water pollution due to illegal discharge into the region’s natural drains, or into the atmosphere through steam. The NGT experimented using a modified technology to reuse discharged waste, but the same was not feasible over a longer period of operations.
• Penalty for units that have violated the law: The GPCB has been instructed to initiate immediate steps for prosecution of industrial units which have not complied with these regulations and recover compensation for damage caused to the environment and public health. This penalty amount would be assessed by a Committee with representatives of CPCB, GPCB, and the National Environmental Engineering Research Institute (NEERI) within one month.
• All counter-applications disposed of: The NGT states that local industry units which have filed applications against the order have no merit and are not maintainable under the NGT Act. As a result, all these applications have been disposed of accordingly.

·       New technology exploration: The NGT is not completely opposed to coal gasifiers but is against the discharge of condensate wastewater and coal tar into the environment. Prior to the revised order banning all gasifiers, the NGT had permitted exploration of technology which reused these discharges during the production processes, but the same was not feasible. As such, the NGT would permit any non PNG synthetic gas generation which would eliminate the problem of these residual discharges.