Macro Economy

Cement prices may continue to move northwards on production cost escalation

G Balachandar Chennai | Updated on October 21, 2021

Impact on the construction sector is expected to be limited

Cement prices are likely to move northwards in the December quarter as a robust demand scenario may provide opportunities for manufacturers to pass on the increase in cost of cement making.

The manufacturers have faced two major price inflations on the cost side — a rise in pet coke and coal prices, and the diesel price hikes. These two components — power and fuel and freight — are almost 55–60 per cent of total cost of cement making.

Contracting margins

A spike in pet coke (domestic pet coke up 80–90 per cent in Q2FY22), imported coal (FOB-Australia up by 180–200 per cent) and diesel (up by 18–22 per cent in Q2FY22) has led to an increase in cost for cement manufacturers. Though better realisations and other lower costs provided some cushion, cement companies couldn’t pass on the high input costs due to the lean period on account of the monsoon season.

Cement players saw margins contract in the second quarter of this fiscal on a sequential as well as on-year basis despite higher cement prices led by a surge in power and fuel as well as freight cost.

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“ACC reported a margin rise of only 10 bps while Ultratech (consolidated) saw margins contract by 345 bps (y-o-y) and 570 bps (q-o-q). However, both players witnessed higher absolute EBITDA led by improved realisations and higher sales volume. Even Heidelberg cement saw margin contraction of over 400 bps year-on-year as well,” said Isha Chaudhary, Director, CRISIL Research.

Robust demand outlook

Cost pressures are likely to stay for the next 2–3 quarters especially with rise in imported coal as well crude prices. Though rise in input materials is expected to keep production costs higher for some time, cement makers may get an opportunity to pass on the increase in production cost during November and December as demand returns after the monsoon phase. The demand outlook is also robust due to a strong government infra pipeline across roads, metros and irrigation segments, revival in commercial real estate, and good demand in the rural housing sector.

“With high single digit growth expected in cement demand in H2 of this fiscal over the year-ago period, cement companies will be able to pass on the cost hikes to some extent (75–80 per cent) if not completely, said Manish Valecha, Analyst-Cement, Anand Rathi Research.

Impending price hikes

Cement companies attempted price increases in September, but there were roll backs as the demand was not supportive. Now, with a favourable demand scenario, their attempts have been so far successful. There have been two price hikes so far — in the first week of October and a couple of days ago. There could be price increase in November and December as well to cover the production cost increases.

Construction sector

Will more price hikes have an impact on the construction sector?

“Limited impact,” say industry analysts. “Cement cost as a proportion of construction cost varies from 8–12 per cent in premium housing to 14–20 per cent in low-cost housing depending on the region and brand of cement used. Even a 10 per cent rise in cement cost will lead to a cost escalation of 1–2 per cent. Thus, impact on residential and affordable housing projects is expected to be limited,” said Chaudhary.

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Cement demand is expected to grow by 11–13 per cent in FY22 on a low base. Despite the robust growth in the current fiscal, it will only be 9–10 per cent higher than peak volumes reported in FY19. However, cost pressures will drive EBITDA margins lower by 150–250 bps in this fiscal, she added.

Published on October 21, 2021

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