Rising production costs pressure cement companies' margins

The sharp increase in cost of cement production may negate a series of price hikes cement companies implemented in the last two months, thus keeping their profit margins under pressure in the March quarter of this fiscal.

Cement companies have hiked prices by Rs 10-15 for a 50 kg bag in two tranches during January and are contemplating another hike of Rs 5-10 a bag in the first half of February due to spiralling coal and fuel costs.

Power and fuel expenses account for about 55 per cent of the variable costs in cement production.

The Railways' recent decision to reclassify cement consignment has further pushed up the cost.

Enthused by the revival in demand after an extended monsoon, cement companies managed to pass on the increase in cost of raw material to end consumers from January. The pick-up in demand was mostly attributed to restocking by major dealers who had brought down their inventory substantially and the resumption of a few infrastructure and housing projects after monsoon.

Demand may shrink

However, industry observers said cement demand may taper off after the Reserve Bank of India's move to mark up the key banking rates – repo and reverse repo – by 0.25 percentage point.

This move will push up the cost of funds for real estate companies and slow down their projects.

Coal prices have been on the rise for the last two quarters and are slated to increase further in the coming months. The price has jumped from $110 a tonne in the June quarter to $125 a tonne in the December quarter while it may rise further in the March quarter, said a cement company executive.

Besides rising coal prices, prices of other major inputs such as gypsum, fly ash and slag are also expected to go up by 10-13 per cent.

New capacity added by the industry in the last one year has kept cement prices under check. The industry has added 14 million tonnes of fresh capacity in the December quarter over and above 60 million tonnes added last fiscal. Another 35 million tonnes of new capacity is expected by FY 2013.

Capacity utilisation has seen a steady drop in the last few quarters. It dipped from 80 per cent in the June quarter to 68 per cent in the September quarter and further to 71 per cent in December.

The cumulative average utilisation is expected to drop to 73 per cent this fiscal against 85 per cent in the corresponding period last year.

Mr K.C. Birla, Chief Financial Officer, UltraTech Cement, said the industry has recorded a growth of just 5.4 per cent in the nine months ended December.

Cement demand may decline to 7 per cent this fiscal against 10 per cent achieved last year even if it achieves a growth of 8-10 per cent in the fourth quarter, he added.

The fall in cement demand in the southern regions including Tamil Nadu, Karnataka, Andhra Pradesh and Kerala has been one of the major concerns for the industry.

In the December quarter the southern region registered a 9.7 per cent drop in demand against an increase of 9.2 per cent last year. While Andhra Pradesh contributed the maximum to the drop in the southern demand with a fall of 29 per cent, in Kerala it fell 4.6 per cent.

The lingering Telangana issue in Andhra Pradesh, delay in implementation of the Government projects in Kerala and political uncertainty in Karnataka have hit the southern region badly.

Most of the leading cement companies such as UltraTech Cement, Shree Cement, ACC and Ambuja Cement have announced a lacklustre performance in the December quarter.

The industry hopes that the improvement in demand and price hikes in January and February will see it through the rising raw material cost in the March quarter.

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