Can Budget 2022 be a watershed moment for India’s Green Hydrogen policy?
Innovation is becoming a popular investment theme. Yet, we are still relying heavily on age-old means for daily survival. It is crucial to deal with near term challenges effectively while ensuring a smooth transition to the new scheme of things.
A case in point—dealing with high energy and raw material costs in the near term at a time when any theme prefixed ‘green’ sells like hotcakes on Dalal Street.
We aren’t the first ones to talk about this subject, but we thought of highlighting some of the latest developments as Budget 2022 is around the corner.
As you might be aware, Indonesia is the largest thermal coal exporter. Nearly 3/4th of coal exports from Indonesia go to four Asian countries—China, Japan, India and South Korea.
However, at the beginning of 2022, the Indonesian government banned the exports of coal for a month. Reason? Perusahaan Listrik Negara (PLN)—an Indonesian state-owned power producer—reported a less than 15-day stockpile of coal.
Although the Indonesian government recently cleared the way for a few shipments, this instance highlights the vulnerability of depending nations.
Story in detail
Indonesian coal miners have to sell 25% of their production to domestic power plants at an administered rate of USD 70/tonne under Domestic Market sales Obligation (DMO).
The coal prices have shot up above USD 200/tonne in the international market. Hence the administered price of USD 70/tonne became the bone of contention between miners and the Indonesian government.
The Indonesian government has now been keen on reworking the DMO rates on a monthly basis instead of the current practice of annual revisions. And miners that failed to fulfil their DMO obligations are likely to feel the heat now.
Investors aren’t much worried about the impact of these developments on Indian markets for now. But going by the questions that managements are getting during the Q3FY22 reviews, you may get some hint as to what can go wrong.
For instance, Aluminium production is a power-guzzling business with power costs accounting for nearly 35%-40% of the metal cost.
Now consider this: National Aluminium Company (NALCO) requires at least 900 MW power to run the full-scale plant. According to the management of NALCO, 700 MW is sourced through captive capacity.
The management has stated in the Q3FY22 review that it has zero dependency on imported coal and has sourcing agreements with a subsidiary of Coal India.
But that need not be the case with every other company not just in the aluminium business, but from any power-intensive industry.
Aluminium plants in India depend on coal-fired power. Thus, any spike in the international coal prices can affect the arithmetic of businesses that buy coal from non-linkage sources.
And it’s not just about coal or energy prices alone. Import dependence and raw material price escalation can cause inflation and disturb the margins and affect the overall production.
We have already seen how semiconductor shortages can bring even some of the automobile behemoths to their knees.
This is one side of the spectrum.
On the other hand, companies such as Reliance Industries, JSW Energy, Indian Oil Corporation, GAIL and NTPC have been keen to tap the green hydrogen opportunity. Green-hydrogen is nothing but hydrogen produced from water using renewable energy sources.
Now you might be wondering what’s the relevance of this for Budget 2022?
Well, the Indian government will have to address a dual challenge of supporting new initiatives such as the green energy mission, and also help Indian manufacturers tackle the cost escalations. Don’t forget for India to claim a bigger share of global manufacturing, it will have to maintain its cost-competitiveness.
On this backdrop it remains interesting to see if the government finds Budget 2022 the right forum to make big announcements pertaining to the green initiatives.
The Green hydrogen mission was announced a year-ago and as far as the stage of its evolution goes, it is at a stage where the national solar energy programme was in 2010.
Can our FM pull a rabbit out of her hat this time?
And as far as innovations are concerned, any technology that can make the massive on-going energy transition smoother and affordable might have a chance of becoming the next big thing!
For now, the innovation theme on Dalal Street seems to be fixated to gaming, e-commerce and the metaverse.
You may also like to read: Marico: on a slippery slope?
The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.