Railway freight data points to recovery in cement volumes1 min read . Updated: 11 Jan 2021, 10:40 AM IST
- It should be noted that cost of key manufacturing inputs such as petroleum coke, among others, are also inching up. In this backdrop, meaningful price hikes are must to prevent operating margin erosion
MUMBAI: Cement volumes transported by the railways grew 35% and 26% on a sequential and annual basis in the December quarter to 35.5 million tonnes, according to data shared by the Ministry of Railways.
An analysis by JM Financial Institutional Securities Ltd shows that the correlation between the two indicates a strong cement volume growth in the third quarter.
Also Read | The curious case of the glowing beaches
Cement demand has picked up from the second half of December on seasonal improvement in construction activity, analysts said.
"Cement demand witnessed sharp rebound in Dec’20 led by pick-up in construction activities post festivals. Additionally, volume push by cement companies is expected to have resulted in strong volume performance in the month. Strong pick-up in execution of infrastructure projects and sudden up-tick in real estate activities in several cities supported the demand, which also negated volume loss from retail segment due to agitation over the new Farm Bills," analysts at Reliance Securities Ltd said in a report on 5 January.
Despite volume growth, prices have remained subdued, show channel checks by various brokerages. "Price correction is attributable to volume push by the cement companies across the regions (barring Southern region). Notably, non-trade prices witnessed steeper contraction, which widened the price differential between trade and non-trade segments in select pockets," added the Reliance Securities report.
Meanwhile, freight costs on volumes transported through railways on a per tonne basis rose 6% y-o-y and 3% q-o-q, showed the JM Financial analysis.
Freight and forwarding costs account for 21-25% of total operating costs for cement companies. Analysts say a 10% increase in freight costs could impact operating margins to the tune of around 200 basis points. A basis point is one-hundredth of a percentage point. It should be noted that cost of key manufacturing inputs petroleum coke, among others, are also inching up. In this backdrop, meaningful price hikes are must to protect operating margin.