Indian cement manufacturers will find it hard to increase prices to mitigate the impact of surging input and freight costs as demand from the real estate and construction sectors haven’t recovered just yet.
Margins of top Indian cement manufacturers – including ACC, Gujarat Ambuja and UltraTech – recorded a 6-8% fall in the December quarter on a year-on-year basis, led by the rise in coal prices. With no respite in the ongoing Russia-Ukraine war, prices of coal and fuel are expected to ascend further.
“Cement companies had a subdued December quarter due to an unprecedented rise in coal costs. Cement manufacturing is a power-intensive process and power and fuel account for about 30% of the total cost. Coal prices have seen more than 50% rise in the last few months thereby increasing power and fuel cost for cement companies and due to subdued demand environment cement companies were unable to pass on the higher cost to the consumer,” Atish Matlawala, senior analyst with SSJ Finance & Securities said.
“Freight cost accounts for about 40% of total expenses and with spiralling crude prices, cement companies are bracing for another headwind. We believe that the Russia–Ukraine war will keep coal and crude prices high, impacting the margins of cement companies,” Matlawala added.
On Monday, oil prices surged with Brent crude touching $139 a barrel, albeit briefly, as the US and its European partners began discussions on banning imports of oil from Russia. Brent crude surged 18% in early trade and was last quoted $9.95 higher at $128.06.
Limestone is the main raw material and many of the cement manufacturers have their mines.
“Most of the cement companies are now increasingly using blast furnace flag to make cement, which is cheaper than clinker by 30-35% and remaining materials are green ingredients, including fly ash. This is also helping in reducing production costs, as earlier 60% clinker, 35% fly ash and 5% gypsum were used to make cement,” Jindal Steel and Power (JSPL), managing director VR Sharma said.
JSPL produces cement from its 1 million tonne plant at Raigarh in Chhattisgarh and sells under the brand name Jindal Panther.
On average, the cost realisation is about Rs 5,200-5,500 per tonne for cement companies in December (Rs 1,500-1,800 is for coal), which will increase to Rs 6,000 per tonne for March quarter. The power and fuel costs, which was about Rs 1,200-1,500 to produce one tonne of cement, is expected to rise to Rs 1,800-2,000 by March and transportation cost will rise to Rs 1,600-1,800 from Rs 1,200-1,300 per tonne, an official with a cement firm said.
The fourth quarter is generally a good quarter for the sector and with the monsoons setting in April-June, the lull period for the sector begins.
“The fall in construction activities was due to unseasonal rains in some parts of the country, the pandemic, curbs in infrastructure spending by certain state governments, scarcity of sand and labour among others. Demand from the housing sector also fell over the past five years,” the official added.
About 50% of the demand for cement is from the Government sector, while the remaining is from the real estate and construction sectors.
Low-Capacity Utilisation
The fall in demand is also leading to a low-capacity utilisation by cement firms. The highest capacity utilisation is at about 75-80% in the eastern region, where demand is high. South has the lowest with 60%, while those in the east and west are in the range of about 70%. However, some of the south-based companies had increased cement prices by Rs 10 per 50 kg bag in February.
During the first nine months of the financial year, cement prices rose by 3-3.5%, hit mainly by spiralling energy prices. Industry experts fear the overall costs for cement-makers, led mainly by rising crude prices, would further soar by 11-12% this fiscal.
