Coal India has brought turmoil to the doorstep of these 3 chemical giants

It's trouble in paradise for India's largest ammonium nitrate producers. Coal India has thrown a spanner in their glorious plans of riding the growth in the Indian mining sector. But how exactly? Let's take it from the top.

The once glorious vision

Coal powers up India. And by extension the country's mining activities. Mining requires ammonium nitrate, which is used in making explosives for mines. Three players-Deepak Fertilisers and Petrochemicals, Chambal Fertilisers and RCF-largely cater to the entire ammonium nitrate market of around 10 lakh tonnes per annum, 60 per cent of which is consumed in coal mining alone.

Naturally, Coal India is the largest consumer of ammonium nitrate. And its coal production (by volumes), which has been on a solid track, growing 9 per cent per annum between FY21-24, is only firming up the demand for the chemical. Further, about 20-30 per cent of the chemical is imported, which leaves more room for its producers.

They are hence doubling down to savour the expected growth. Deepak Fertilisers, hopes to be the biggest beneficiary. With a market-leading share of 40 per cent and an ammonium nitrate production capacity of 5.4 lakh metric tonnes per annum(MTPA), it is undertaking debottlenecking and greenfield expansion to double its capacity to 10 lakh MTPA. The feat, if achieved, will place it among the world's three largest pure-play ammonium nitrate manufacturers. RCF, another significant player, will undertake capex to increase its production capacity to 3.3 lakh MTPA. Chambal Fertilisers, a new entrant, is setting up a 2.4 lakh MTPA-ammonium nitrate plant with a capex of Rs 1,645 crore.

By now, you might be puzzled. Everything is rosy. Demand is good and big players with big capabilities are plunking down money to become even bigger. So, what exactly could have gone wrong?

It's Coal India

Coal India was so far a key consumer of ammonium nitrate. It now wants to be a key supplier, too. But primarily to meet its own needs. The company will set up a joint venture with BHEL for a coal gasification plant, which is expected to produce 6.6 lakh tonnes of ammonium nitrate. Coal India will be using most of this output for captive consumption to improve its margins and capacity utilisation, meaning it will cease to be the biggest consumer, eroding market demand. And since it will be a producer too, it may cause a supply glut as well, essentially dealing a two-sided injury to the chemical market!

As for the chemical producers, their growth plans and optimism is perhaps too good for their own good. Chambal's management affirms that market demand, growing at 6 per cent per annum, will continue to be robust as mining activities will remain vigorous. They expressed confidence that any additional supply caused by Coal India's entry will easily be absorbed. But even a back-of-the-envelope calculation proves this to be untrue.

The likely impact

Assuming a 7 per cent annual growth in the current ammonium nitrate market of around 10 lakh tonnes, and a generous 10-year period for the Coal India-BHEL plant to be commissioned, the demand would rise to around 20 lakh tonnes by 2034-35. Of this, Coal India is meant to consume 6-7 lakh tonnes. But almost 16 lakh tonnes will be produced by the three chemical players, going by their current capacity addition plans, for the remaining demand of only 13 lakh tonnes. Suffice it to say, the market that is currently deficient in domestic supply will be flushed over the years.

Investors' takeaway

Coal India has thrown a curveball that's hard to dodge. The three chemical makers are now staring at a serious disruption, even if it's some years down the line, especially since they earn a large chunk of their income from ammonium nitrate. The chemical made up almost 50 per cent of Deepak Fertilisers' operating profit in Q1 FY25. And nearly 32 per cent of RCF's revenue in FY23(it's the latest split we could find). As for Chambal, it is expected to make up around 20 per cent of the company's fixed assets once the capex is over.

The only solace now remains in the fact that coal gasification has seen limited success in India, even when it has been in force since the 1960s. Part of the reason could be the high ash contents in India's coal reserves, which reduces the overall efficiency of the process. If this plays a part in delaying, or derailing Coal India's goal, the chemical makers could heave a sigh of relief. Perhaps, the market is also pinning its hopes on this, given the three stocks have barely reacted to the development.

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