Higher coal costs could make cement dearer

The new pricing policy unveiled by Coal India Ltd, one of the largest domestic coal suppliers, may push up input costs of cement companies by Rs 5-10 for a 50-kg bag. This might also hamper recovery in demand, if companies decide to pass on the entire incremental cost to end-consumers.

Cement companies buy 45-50 per cent of their coal requirement through domestic linkages and the balance from international and domestic open markets.

New formula

As per the new mechanism, Coal India will price its produce based on ‘gross calorific value' instead of ‘useful heat value' that is currently used.

The average price of non-coking coal is expected to increase by 22 per cent to Rs 2,590 (Rs 2,118) a tonne.

The ‘C' and ‘D' grades will see maximum hike of 55 and 44 per cent respectively. This will be followed by an average 37 per cent increase ‘E' grade coal. The ‘B' grade may have the least increase, of two per cent.

“Though the exact quantum of cement price hike has not been decided yet, we expect it go up by at least Rs 5-10 a bag.

“We will take a measured decision as the demand has just started looking up,” said a cement company official.

Mr Ajit Motwani, Research Analyst, Emkay Global Financial Services, said the new pricing mechanism is effectively a price increase for all sectors.

For the cement industry, power and fuel cost will go up by Rs 88-1,095 to produce a tonne, he added.

Robust sales

Despite two price hikes, cement sales remained robust in December on the back of demand from the realty and infrastructure sectors. All major cement producers registered growth in the last two months of 2011 over the previous two months, and also over the year-ago period when demand was sluggish.

However, the last quarter of this fiscal will remain a challenge as fundamentally there is not much change in the economy, said an analyst.

“Cement makers' ability to pass on the incremental cost on logistics and raw materials to end-consumers will be tested.

“Besides, ramp up of production at every sign of demand recovery will add to the pricing pressure,” the analyst said.

Production costs

Cost of production for cement companies has seen a steady growth. It grew by 30 per cent to Rs 3,325 a tonne in the second quarter of this fiscal against Rs 2,538 in the second quarter of 2009-10.

The rise was primarily led by a 35 per cent increase in power and fuel costs, a jump in international and domestic coal prices, and mark up in grid power prices.

Freight charges, which account for 19 per cent of the total cost, rose by 25 per cent during the same period. The industry also was impacted by rupee depreciation.

suresh@thehindu.co.in

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