Fuel cost surge hits cement firms

Cement companies are facing margin pressure because of rising prices of imported coal and petcoke, a byproduct of oil refining, and sluggish demand due to demonetisation.

While input costs have risen, the price of cement has come down. ICRA Ratings says while cement prices have gone down in the southern and western markets particularly, volume growth has been adversely impacted in all regions.

In south India, the price of a cement bag declined by ~30 during October-November, and is around ~300 now.

In the western markets, after the price increased by ~15 a bag in October and reached ~265 a bag, it slipped to ~240 in the next month.

However, the prices have held in the northern and eastern markets.

This prices of the two fuels are unlikely to come down in six months. Brokerages are reckoning on a 15-20 per cent demand drop this month.

According to the data from S&P Global Platts, petcoke prices rose 37 per cent between July and December at $95.75 a tonne while imported coal prices rose from $52 per mt in July to $71.5 as on December 19.

“Because of increasing Indian demand and maintenance works at refineries in the US, supply has tightened and this led to a steep increase in prices during the latter part of the year,” said Deepak Kannan, managing editor, Asia Thermal Coal, S&P Global Platts.

Cement plants alternate between coal and petcoke. Because of low petcoke prices last year and early this year, many cement companies had started using it as a substitute for coal.

Fuel accounts for at least 40 per cent of a company’s input costs and cement firms normally store enough to meet the requirements of 45 days.

“There may be an impact on the margins of the cement companies,” said HM Bangur, managing director, Shree Cement. An analyst working for Motilal Oswal said: “It is the cost advantage which differentiates a cement maker from others and ensures good operating margins. With both petcoke and coal prices rising, this advantage is disappearing.”

Kannan expects petcoke prices to soften in the coming year, but if that does not happen, cement companies may switch to coal. But there is no clarity on the movements of coal prices either.

“Given the fact that cement demand is driven significantly by real estate, it is likely to get impacted in the near term. Overall, the demand for cement is expected to be adversely impacted by this development in the next two to three quarters,” said Sabyasachi Majumdar, senior vice-president, ICRA Ratings, in a statement.