Cement spreads are improving but will they sustain?1 min read . Updated: 06 Mar 2019, 04:15 AM IST
- All-India cement prices increased by ₹17 per 50kg bag to ₹334 in February, prices of imported petcoke have also declined 20%
- Cement demand may remain muted in run-up to general elections, making it difficult for firms to hold on to the price hikes
Thanks to steep cement price hikes and easing input costs, spreads of cement firms are improving. According to analysts at Kotak Institutional Equities, spreads are estimated to rise 5% in the March quarter, compared to the preceding quarter. Spreads is the difference between cement prices and energy costs on a per tonne basis for cement companies.
Since cement price hikes were mostly led by the southern and western parts of India, higher increases in spreads are seen for cement producers having exposure in these regions. Kotak assumes 70% of energy usage pertains to petroleum coke (petcoke) in its spread calculations.
The latest dealer channel check by the brokerage house showed that all-India cement prices increased by ₹17 per bag to ₹334 in February. One cement bag weighs 50kg. Region wise, cement prices increased by ₹40 per bag on an average to ₹357 in the south and by ₹14 per bag to ₹316 in the west. Prices in other parts of the country saw a marginal increase or decline.
At the same time, prices of imported petcoke—a key input material—have fallen around 20% compared to the September quarter, Kotak said in a report on 26 February. Similarly, domestic petcoke prices were down by 6% from the September quarter, it added.
While the softening in energy costs is welcome, the recent revision in wages will also have a bearing on operating margins of cement producers.
Analysts estimate margins to be hit by around 2% due to higher staff expenses. As such, for operating margins to significantly improve, recent price hikes need to sustain.
Note that on some previous instances, companies had failed to hold on to higher prices due to lack of adequate demand. And, even though the March and June quarters were seasonally strong for the sector, in the run-up to general election, cement demand may remain muted. Analysts say it is too early to call the current round of price hikes as the return of pricing power.