Another headache for cement cos amid weak prices?

Cement prices have yet to significantly improve, and realizations have remained lacklustre. Meanwhile, rising costs are adding pressure, raising concerns about profitability and future earnings.

The market absorbed price increases undertaken by cement manufacturers towards the end of the December quarter (Q3FY25). So far in Q4FY25, all-India average cement prices have risen by ₹10 per bag, or 3%, sequentially to ₹326, according to an IIFL Securities dealer channel check. This could offer some respite to Q4 earnings, particularly for pan-India cement players.

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Region-wise, prices in northern and central India have risen by 5-6% sequentially in Q4-to-date, followed by western India, where prices are up 2.5%, according to an IIFL report dated 24 February.

However, southern and eastern India continue to face pricing pressure due to higher competition and weak demand, respectively.

The March quarter (Q4) is typically a strong season for cement as construction activity picks up. However, significant price hikes in March seem unlikely, as companies tend to focus on pushing volumes to meet their annual sales targets. Some markets may attempt increases of ₹5-15 per bag, but sustaining them could be difficult. While select markets may attempt price hikes in the range of ₹5-15 per bag in March, sustaining these may be challenging, said Elara Securities (India).

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“Historical trends also reflect this – Only one among the past three March months has shown a positive month-on-month price movement," said the Elara report dated 25 February. So, a more meaningful price hike can be expected only in April.

Against this backdrop, an emerging worry for the sector is the reversal of cost tailwinds. Rising prices of domestic and imported petroleum coke (pet coke) and coal, along with the Indian rupee’s depreciation, can hurt profit margins. Fuel prices account for an estimated 20-25% of the sector’s total operating costs.

“The average imported coal prices (Australia- Newcastle coal prices - 6,000 kcal/kg) have been gradually increasing since December to $139 per tonne in February (up 12% year-on-year and 3% month-on-month), while the average imported pet coke price increased to $131 per tonne in February (up 5% year-on-year and 1% month-on-month)," said a Yes Securities report dated 25 February.

Domestic pet coke prices, too, have been trending higher. Moreover, domestic e-auction coal prices may increase further.

That said, the impact of pricier fuels could come with a lag of a few months, given the availability of low-cost inventory. Due to an increased focus on volumes and market gains, companies could manage to sail through Q4FY25.

“We expect industry profitability to improve in Q4FY25 versus the industry average of ₹800/tonne (Ebitda) in Q3, driven by higher cement prices and likely operating leverage benefits (volumes to be up quarter-on-quarter)," added the IIFL report.

Nevertheless, rising operating costs remain a negative sentiment and could lead to earnings downgrades for FY26. Here, it is worth noting that the cement sector has been consistently increasing its reliance on green energy and is also working on implementing cost-efficiency measures to reduce expenses. These measures are expected to aid the sector's medium-to-long-term profitability outlook.

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For now, companies heavily dependent on imported coal or pet coke or those lacking sufficient captive coal mining sources could feel the heat from elevated energy costs.

Meanwhile, the performance of large cement stocks has been mixed in the past year. Valuations have moderated, but there is little comfort unless the pricing scenario meaningfully improves.