Rising coal prices will impact cement companies

Rising coal prices will impact cement companies

New Delhi: Coal India’s recent price hikes caught customers off-guard . On an average, the company increased prices by 11-30% and that is sure to hurt local cement and power producers

The cement industry gets 45% of its coal requirement from linkage coal with the balance procured from the open market, according to estimates from Emkay Global Financial Services. What’s worse, international coal prices are rising faster. Supply disruptions due to heavy floods in major coal producing countries such as Australia led to a rally in coal prices. The benchmark ICE New Castle coal futures for March 2011 delivery rose 42% in the past 12 months.

“We estimate power and fuel cost for the industry (cement) to go up to 964 per tonne i.e 6.5% higher than the third quarter levels," says Emkay. That would naturally lower the earnings of companies such as ACC, Ambuja Cements, Ultratech Cements, Madras Cements and India Cements who already face margin pressures through low capacity utilization. Emkay lowered 2011-12 per share earnings for these companies by 2-6%.

“The cement industry is already grappling with significant cost pressure led by sharp surge in international coal/petcoke price, significant jump in crude price, jump in fly ash prices. Till third quarter total cost per ton has gone up by 16% yoy," the brokerage noted.

It is no different for power producers. However, all of them are not expected to have impact on earnings because some of their plants work as captive power units and have the option of passing through the rising costs. Adani Power is estimated to have maximum impact on earnings due to hike in prices, according to IDFC Securities which lowered the firm’s fiscal 2013 earnings estimates by 2%.