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Home >Markets >Mark To Market >Cement  price hikes are welcome, but offer only near-term cushion

Investors in cement stocks can heave a sigh of relief now that the much-awaited price increases have happened. There were concerns that input-cost inflation would start eroding the sector’s operating margins soon without price hikes.

Latest dealers channel check by Motilal Oswal Financial Services Ltd showed that in March, the cement prices were raised around 15–30/bag across regions. One cement bag weighs 50 kg. On an average, at an all-India level, a cement bag now costs 360, up 5% month-on-month (m-o-m). Region-wise, prices in the south have increased by a steep 30/bag, up 8% m-o-m. Despite the capacity addition spree, cement players in eastern India raised prices by around 20 a bag, showed the survey. Further, prices in north India were up 4-5% compared to the preceding month, but central India saw lower hikes of around 5-10 per bag.

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Analysts said that robust demand, on the back of a pick-up in urban real estate and infrastructure activity across most regions, has aided price hikes. But these may offer only near-term protection to margins.

Transferring cost burden
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Transferring cost burden

“In the current demand scenario, this round of price increases would be absorbed. It does address the margin compression worry to some extent. But are these enough? It would depend on how prices of petroleum coke and diesel move from hereon. Ocean freight has also increased, so companies importing petroleum coke will have to take into account those costs as well. We see further upside in these commodities, and this could require more price increases in the future, and it remains to be seen if further hikes would be absorbed by the market," said an analyst with a domestic brokerage house who did not want to be named.

From the past few quarters, the sector has benefited from benign raw material prices. In the December quarter, operating margins for some key cement manufacturers were at a multi-year high.

However, with crude prices recovering, that tailwind has turned into a headwind for cement manufacturers. On a year-on-year basis, petroleum coke and diesel costs have risen by more than 70% and 30%. Some cement makers have replaced petroleum coke with coal in their fuel mix, but coal prices, too, are on an upswing.

In a post-earnings conference call with analysts, the management of UltraTech Cement Ltd expressed concerns on input-cost inflation.

They said that fuel forms nearly 13% of cost for the cement industry and coal and petroleum coke, both are trading around $110 per tonne as compared to somewhere around $60 or $65 in June last year. “Petroleum coke market has been soaring over the last few months, and is expected to peak by June in all probability," the management added.

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