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Business News/ Markets / Mark To Market/  As costs head north, cement makers switch to cheaper fuel
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As costs head north, cement makers switch to cheaper fuel

Power and fuel expenses account for 25-30% of the sector’s total operating cost, so operating margins are under threat

Analysts at JM Financial Institutional Securities Ltd estimate an overall impact of ₹200-250 per tonne on the variable costs of cement companies owing to higher commodity prices. (Hindustan Times)Premium
Analysts at JM Financial Institutional Securities Ltd estimate an overall impact of 200-250 per tonne on the variable costs of cement companies owing to higher commodity prices. (Hindustan Times)

Rising commodity prices are likely to hit the cement sector hard. The cost of imported petroleum coke (petcoke), a key input, has more than doubled to around $130 per tonne on a year-on-year basis. This steep surge is a result of higher sea freight and supply-side constraints.

Add to this a 37% year-on-year increase in diesel prices, which translates into elevated freight costs. Power and fuel expenses account for 25-30% of the sector’s total operating cost, so operating margins are under threat. To tackle this, cement companies are using more coal instead of petcoke. On a year-on-year basis, the price of thermal coal has risen by 82% to nearly $100 per tonne, but it remains a cheaper alternative.

In the March quarter, the fuel mix of UltraTech Cement Ltd between petcoke and imported coal stood at 30% and 60%, respectively, compared to 77% and 10% last year. Also, the company has increased the share of green power from 11.5% last year to 12.3% in the financial year 2021.

For peer Dalmia Bharat Ltd, petcoke accounted for 52% of its fuel mix in the March quarter of FY21 versus 70% in Q3FY21. The company expects the share of alternative fuels to increase from 8% in FY21 to 15% in FY22. Coal accounted for 40% of its fuel mix in FY21. Among regional companies, south-based Ramco Cement Ltd cut its petcoke usage from 48% in FY20 to 41% in FY21. Petcoke usage in Q4FY21 was just 23% versus 66% in the same quarter of the previous year, its management said. For now, this strategy has worked in alleviating the pressure on margins. However, stellar margins may be a thing of the past for the sector, said analysts.

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Satish Kumar/Mint


“While low-cost inventory and the shift to coal helped the industry curb power and fuel cost inflation in 4QFY21, we estimate this to rise by 100-120 per tonne sequentially (10-12%) in 1QFY22," said a Motilal Oswal Financial Securities Ltd report dated 28 May. The domestic brokerage house estimates freight cost to rise by around 30 per tonne sequentially, or 3%, in the first quarter of fiscal 2022, the report said.

Analysts at JM Financial Institutional Securities Ltd estimate an overall impact of 200-250 per tonne on the variable costs of cement companies owing to higher commodity prices. Cement companies have also passed on the burden of increased prices to customers. Dealer channel checks show that so far in the June quarter, average cement prices are up 6% compared to the previous quarter.

At an all-India level, one cement bag weighing 50 kg currently costs around 368. The improvement in prices is led by sharp hikes in the east, south and Maharashtra. However, given the seasonal weakness and pandemic-led demand uncertainty, analysts do not expect price increases to sustain. In short, despite all efforts, a margin squeeze is most likely for cement companies.

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Published: 30 May 2021, 10:28 PM IST
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