Cement firms’ margins may erode in Q2 on higher petcoke prices
The benefit that cement manufacturers got from low input prices in the June quarter, which translated to better margins, is likely to reverse. And some brokerages have started raising red flags about it. Cement companies should brace for some erosion at the earnings before interest, taxes, depreciation and amortization (Ebitda) level in the September quarter due to hardening fuel costs.
Data provided by S&P Global Platts shows that globally, the prices of thermal coal, the FOB Richards Bay 6,000 kcal/kg, surged from $50.283/mt in the beginning of the year to $62.445/mt in July. Richards Bay 6,000 kcal/kg NAR (net as received) is a grade bought by Indian buyers, especially cement companies.
The chart represents the monthly average price of this grade of coal on a free-on-board (FOB) basis. This is the price the buyer pays to purchase coal and get the cargo loaded on to a mother vessel at Richards Bay Coal Terminal in South Africa.
Similarly, average petroleum coke, or petcoke, prices rose from $45/mt in January this year to $81/mt in August. Supramax cargo of imported petcoke with typical 6.5% sulphur is delivered to India’s east coast port of Krishnapatnam. S&P Global Platts has been tracking the price of petcoke delivered to India on a weekly basis from March 2015 and this is highest price since then.
“Petcoke prices were trading at about close to $40/mt CFR India (CFR=cost and freight) in March this year. Cement companies found this price very attractive and started procuring in huge quantities, shifting from thermal coal. In fiscal 2016, total India petcoke imports stood between 3.5-4 million tonnes . But this year, in July alone, more than 1 million tonne of petcoke arrived in India,” Deepak Kannan, managing editor, Asia Thermal Coal, S&P Global Platts told Mint.
Maintenance issues with a few US refineries earlier this year tightened supply while demand continued to rise, leading to a steep increase in petcoke prices, while thermal coal prices have been driven by supply cuts and a shift in demand, he added.
According to some experts, while it is certain that margins will begin to erode from hereon, it is difficult to quantify the exact impact now because some cement companies may have petcoke inventories acquired at low cost. Also, the hit on margins would vary from one company to another based on their usage of petcoke and coal.
“In the last three months, domestic petcoke prices have surged from Rs.1,200-1,500/tonne and players like ACC, Ambuja and UltraTech have increased petcoke usage to 60-75%; hence, operating cost is expected to harden from current quarter. Considering 50% of impact in current quarter, power and fuel cost is likely to surge by Rs.50-100/tonne. Further, increase in crude price also has an impact on packaging costs. However, looking at price trend of first two months of 2QFY17E, average price tends to be higher by 2-3% year-on-year, which may provide a cushion and arrest margin erosion,” an analyst with Reliance Securities said.
Further, Kannan cautioned that as the monsoon season ends, Indian buyers are expected to come back into the market for restocking, but they are staring at very high coal prices.
The second quarter of the fiscal year is a seasonally weak one for this industry. The demand lull has led to a correction in cement prices in most parts of the country. And with the sharp rise in fuel costs, Indian cement companies are faced with a double whammy this time.