The recent hike in diesel prices may hit the profit margins of cement companies, as they will find it difficult to pass on the incremental cost to end consumers due to fall in demand.
Freight accounts for the major cost for cement companies as they transport not just the finished product and clinker, but also key raw materials like coal and limestone from various destinations. The Government hiked diesel prices by Rs 5.62 a litre last Thursday.
H. M. Bangur, Managing Director, Shree Cement, said the cement industry may have to absorb a part of the impact due to the diesel price hike, while attempting to pass on the incremental cost over three to six months.
“The cost increase to be borne by companies has to be made up by improving the operational efficiency and cutting cost by other means over a period of time,” he added.
Freight rates hiked
The All-India Motor Transport Congress has already increased the freight charges across the country by 15 per cent. AIMTC has about 80 lakh truck operators registered under its umbrella.
The hike in freight comes after a reduction by three to four per cent implemented last month due to a sharp drop in demand. The cargo availability had fallen by 15 to 20 per cent on the back of a general slow down in industrial activity.
The fall in international coal prices will help companies tackle the sudden cost push. Coal import prices are down by 19 per cent in the first five months of this fiscal. Even after adjusting for the sharp depreciation in currency, international coal prices are down seven per cent in rupee terms, said Ajit Motwani, Research Analyst, Emkay Global Financial Services.
Demand slow down
Weak demand from the real estate and infrastructure companies hit cement sales in the last two months. Cement companies had to cut production to match the fall in demand.
ACC sales were down three per cent at 3.76 million tonnes (mt) in the first two months of this quarter, against 3.89 mt recorded in the same period last year.
Production dipped four per cent to 3.61 mt (3.78 mt). Similarly, Ambuja Cement dispatches dipped marginally to 3.15 mt (3.16 mt), while production dropped one per cent to 3.15 mt (3.19 mt).
Cement demand is the reflection of gross domestic product (GDP), said Bangur.
“With the moderation in the GDP growth in the last few months, cement demand has also turned weak. However, given the Government impetus on infrastructure spending and economic growth, cement demand should look up soon,” he said.