Economy

Will high auction prices of limestone affect margins of cement makers?

Keerthi Sanagasetti | Updated on September 24, 2019 Published on September 24, 2019

The data on the Ministry of Mines website reveals that, of the 18 limestone mines auctioned so far, final prices offered ranged from 1.1 to 25 times of the reserve prices set.   -  Bloomberg

Existing reserves and synergies from the consolidation of players is expected to cushion the impact

BL Research Bureau

Limestone auctions by the Centre have witnessed winning bids as high as ₹735 a tonne, going by latest data available with the Ministry of Mines. In 2015, the Centre amended the mining laws, through the MMDR Amendment Act 2015, wherein it was stated that instead of renewing the mining concessions post expiry, they are to be granted only through competitive bidding by auction. The process of bidding was resorted to adding significant premiums to the State’s kitty- on the royalty currently earned - and to ensure minimum disruption in mineral availability.

The data on the Ministry of Mines website reveals that, of the 18 limestone mines auctioned so far, final prices offered ranged from 1.1 to 25 times of the reserve prices set.

Read also: Aggressive limestone bids may cap cement cos profit

Companies like, Ultratech cement had reportedly bid for as high as ₹685 and ₹735 a tonne, thereby bagging two mines- one each in Chattisgarh and Madhya Pradesh. The mines have limestone reserves of 61.96 and 124 MT respectively, as per the data on Ministry of Mines website.

In comparison with the auction price, companies currently pay a maximum royalty of ₹82/tonne to the States, for mines allotted to them before the enactment of the new law. For cement manufacturers, raw material, energy and freight comprise 70-80 per cent of their total costs. Increase in any one element can significantly eat up their profit margins. Limestone to Cement ratio is approximately at 1.5:1, meaning 1.5 tonne of limestone goes in the production of 1 tonne of cement.

At a time when cement manufacturers have seen the highest EBITDA per tonne in a decade (in the latest June quarter), will this increase in raw material price act as a bummer?

Long lease period

Analysts estimate that the effect of inflated prices in limestone bidding will only reflect in the long term. This is because remaining lease period for the limestone reserves allotted (under the old regime) to cement manufacturers on a royalty basis is very long.

This is also reflected in the fact that, over the last three years, since the amendment to MMDR Act, only 2.7 billion tonnes have been auctioned. This is only 1 per cent of the 230 billion tonne limestone reserves in the country.

Pricing power

Secondly, the consolidation in the industry has had a multitude of benefits for cement manufacturers, in the form of synergies in logistics and procurement and better pricing power. That apart it also provided the cement companies with access to vast limestone reserves, which were allotted to the company that was acquired.

For example, giants like Ultratech are hence likely to be immune to this price rise, in the near term, as they are sitting on huge reserves of limestones. Through its recent acquisition of Binani Cements, Ultratech had bagged additional limestone reserves with a combined reserve life of 35-40 years, with no other royalty being paid.

Though the exact quantum of reserves are not known, the company had in its annual report stated that the acquisition of Binani Cements, also provides abundant additional limestone reserves sufficient to cater to even additional capacities at lower prices compared to auctioned prices.

Binod Modi, the Research Analyst, Reliance Securities, said that the players could eventually pass on the increase in the cost of limestone through price rise in the future, given the dominance of few players, thereby securing their margins.

Published on September 24, 2019
This article is closed for comments.
Please Email the Editor