The Hindu Business Line : Cement cos may feel the pinch as coal costs rise

2008 estimates
Coal cost for India Cement is expected to jump by Rs 335 per tonne.
Grasim Industries’ coal cost may go up by Rs 522 a tonne.
ACC’s cost is likely to rise by Rs 261 per tonne, Ambuja Cements Rs 261 per tonne and UltraTech Cement by Rs 455 per tonne.

Suresh P. Iyengar

Mumbai, Dec. 15 Sporadic increase in cement prices in the third quarter of 2008 is unlikely to compensate the high power and fuel cost incurred by manufacturers.

Cement companies buy a certain percentage of their coal requirement through coal linkages at administered prices that are lower than market prices. The remaining quantity is purchased from the open market.

“The price of coal over the year has risen sharply. It has appreciated by 26 per cent in October alone,” said a Lehman Brothers research report. Moreover sea freight rates have risen substantially.

Among the top line companies, India Cement is likely to report a rise of 21 per cent in coal cost, the report adds.

Its coal price is expected to jump by Rs 335 per tonne in Q3 of fiscal 2008 against Rs 275 reported in Q2 of fiscal 2008.

“A combination of benign pricing and high fuel costs will lead to a dent in the profitability of cement companies,” said Mr Satish Kumar, research analyst of Lehman Brothers.

Analysts expect Grasim Industries’ coal cost in the third quarter to go up by Rs 522 a tonne, ACC Rs 261 per tonne, Ambuja Cements Rs 261 per tonne and UltraTech Cement by Rs 455 per tonne.

“The impact of coal price rise on companies may vary with their dependence on imports. For instance, India Cement imports about 70 per cent of its requirement. Even domestic prices are mostly linked to global markets,” said Mr Rajan Kumar, analyst, Networth Stock Broking.

Fall in despatches

Lower winter demand and drop in despatches in November have taken a heavy toll. Despatches from top four players — Grasim, ACC, Ambuja Cements and UltraTech Cement — declined by one per cent year-on-year to 52.37 lakh tonnes in November. This could be partially due to lower despatches from the two Aditya Birla group companies which declined 6.84 per cent y-o-y to 22.97 lakh tonnes.

In October 2007, depatches of the top four companies rose 3.2 per cent y-o-y to 57.93 lakh tonnes.

“The growth reported in the two months was much lower than that in the quarter ended September. Total despatches in Q2 of the four players grew by 11.3 per cent y-o-y to 157 lakh tonnes due to a low base effect in the previous year,” said an analyst.