Russia-Ukraine standoff to trouble cement makers

As if the likely economic shock of the ongoing Russia-Ukraine standoff and the related global geopolitical scenario is just not enough! A significant rise in cement prices seems round the corner as well. Actually, there has been a substantial increase in imported coal prices in the last one month. The price of imported coal from South Africa has gone up by nearly 75 per cent, while the price of imported coal from Australia has gone up by 52 per cent during this month. Over the last two weeks only there has been increase in imported coal prices from these two countries by 40 per cent- 50 per cent.

At present, imported coal prices are significantly higher than their peak in Oct'21 (e.g. South African coal price stood nearly $300/t v/s its peak of $248/t). Petcoke prices too have started to rise. And as a consequence, Reliance Industries has already raised petcoke prices to Rs 17,980/t for Mar'22 (up 24 per cent from Feb '22 levels).

That's not all. It is apprehended that there will be a further increase in domestic/imported petcoke prices as cement companies would want to maximize the usage of petcoke. Experts are of the view that at current prices, usage of petcoke will fall nearly 40 per cent cheaper than imported coal prices (kcal cost of petcoke will be Rs 2.3/kg v/s Rs 4.1/kg for South African coal).

What is worrying is that on an average, the operating cost/t for the cement industry increases by Rs 41-52/t (nearly 5 per cent of 3QFY22 EBITDA/t) for every $10/t increase in petcoke and imported coal prices. Therefore, it is estimated that the cement industry will have to raise prices by nearly Rs 3/bag to offset the impact of a $10/t change in the coal/petcoke prices.

Mind you that apart from higher coal/petcoke prices, the recent increase in crude prices/ocean freight rates may further put pressure on operating cost for the industry. Higher crude prices may lead to a rise in diesel price, which will lead to higher freight costs (it is estimated that a 5 per cent change in diesel price to impact opex by nearly Rs 20/t).

It is pertinent to mention here that led by an increase in coal/petcoke prices, average variable cost/t for a section of cement companies rose by nearly 467/t over 1Q-3QFY22, which led to an 8.4pp decline in average gross margin as the industry was not able to pass on the rise in input costs. This, in turn, led to an Rs 490/t reduction in average EBITDA/t for this group of cement companies in this period.

At this outset, one must remember that the increase in cement prices in Jan-Feb '22 have not been strong (average price in 3Q seems to be up by nearly 2 per cent compared to 2QFY22 levels) as there was no recovery in demand. Demand fell 3-4 per cent YoY in Jan'22, while the same in Feb'22 is expected to be lower compared to last year's levels. Therefore, the cement industry needs to take substantial price increases to offset the inflation in current raw material cost. This looks difficult in the current tepid demand environment. Though cement demand is expected to recover post the ongoing state elections, a significant price rise becomes difficult to sustain at once.