As costs move north, cement makers switch to cheaper fuel

Rising commodity prices will likely hit the cement industry hard. The cost of imported petroleum coke (petroleum coke), a key input, has more than doubled to around $ 130 per tonne on an annual basis. This sharp increase is the result of the increase in sea freight and constraints on the supply side.

Add to that a 37% annual increase in diesel prices, which translates into high freight costs. Electricity and fuel expenses account for 25-30% of the total operating cost of the industry, so operating margins are at risk. To remedy this, cement factories use more coal than petroleum coke. On an annual basis, the price of thermal coal has increased 82% to nearly $ 100 per tonne, but it remains a cheaper alternative.

In the March quarter, UltraTech Cement Ltd’s energy mix between petroleum coke and imported coal was 30% and 60% respectively, compared to 77% and 10% last year. In addition, the company increased the share of green energy from 11.5% last year to 12.3% in fiscal 2021.

For its counterpart Dalmia Bharat Ltd, petroleum coke represented 52% of its energy mix in the March quarter of fiscal 21 compared to 70% in the third quarter of fiscal 21. The company expects the share of alternative fuels increased from 8% in FY21 to 15% in FY22. Coal represented 40% of its energy mix in FY21. Among regional companies, south-based Ramco Cement Ltd reduced its petcoke consumption from 48% in FY20 to 41% in FY21. Petcoke’s usage at T4FY21 was only 23% compared to 66% in the same quarter a year earlier, its management said. For now, this strategy has helped ease the pressure on margins. However, exceptional margins may be a thing of the past for the industry, analysts said.

“While low cost inventories and the shift to coal have helped the industry curb the inflation of electricity and fuel costs in 4QFY21, we estimate that will increase by 100 to 120 per tonne sequentially (10 to 12%) in the 1st quarter of fiscal 22, “said a report from Motilal Oswal Financial Securities Ltd dated May 28. The national brokerage firm estimates that freight costs will increase by ‘about 30 per tonne sequentially, or 3%, in the first quarter of fiscal 2022, according to the report.

Analysts at JM Financial Institutional Securities Ltd estimate an overall impact of 200-250 per ton on the variable costs of cement plants due to rising raw material prices. Cement companies have also passed the burden of rising prices on to customers. Distributor checks show that so far in the June quarter, average cement prices are up 6% from the previous quarter.

Across India, a bag of cement weighing 50 kg currently costs around 368. The improvement in prices is due to sharp increases in the east, south and Maharashtra. However, given seasonal weakness and uncertain demand due to a pandemic, analysts don’t expect price increases to hold. In short, despite all efforts, a tightening of margins is very likely for the cement plants.

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