Cement Prices Seen Rising As Costs Continue To Spike
Cement prices are set to go up as costlier Asian thermal coal and higher gas price outlook in Europe are likely to swell expenses for cement manufacturers. At least that’s what the market leader has indicated.
Power and fuel costs are likely to increase by 10% in the April-June quarter because of a steep rise in coal and pet coke prices in March, UltraTech Cement Ltd. said in a post-earnings conference call. That, it said, means price hikes will need to be passed on to consumers for profitability to improve sequentially.
The pan-India cement maker indicated a price hike of Rs 30 a bag (Rs 475 a tonne effectively) in April to make up for higher commodity costs.
According to dealer checks by Kotak Institutional Equities, cement producers tried a Rs 15-20 a bag (5%) hike pan-India, led by sharper increases in the south and the east for April. Only a part of this would get absorbed and more such hikes could be attempted in the coming weeks, it said.
For the quarter ended March, prices rose 6% year-on-year on an all India basis, the brokerage said.
Cost inflation, muted volume growth and inadequate price hikes led to margin contraction for the quarter ended March.
UltraTech reported flat volumes and its power and fuel costs were higher than pan-India peers ACC Ltd. and Ambuja Cements Ltd. Yet, its operating profit per tonne fell the least. That outperformance was primarily driven by operating leverage benefits and higher realisation—or what it makes on every tonne of cement—in the east.
According to UBS, UltraTech’s margin is expected to contract given its “inventory policy” and also the recent sharp surge in global energy prices has yet to reflect in the company’s power and fuel cost.
Higher prices of petcoke and coal usually reflect in the financials of the cement makers after a lag of 30-45 days.
Margins contracted for ACC and Ambuja as their costs rose. Price hikes in a seasonally strong quarter did offset pressure to an extent.
Jefferies downgraded Ambuja Cements to ‘hold’ from ‘buy’ citing the sticky fuel inflation and a recent run up in the stock prices.
Cement demand, UltraTech’s earnings presentation showed, has been sluggish in the north and east rural markets, and infrastructure demand was “mixed” in the four quarter. That, it said, was likely driven by lower government spend and inflation impact on construction in rural Indian. Demand in March, it said, was “relatively stronger” and has seen reasonable trends in April despite price hikes.
ACC estimates 7% demand growth in 2022 compared with 11-13% witnessed by the industry in the previous year, said a report from Motilal Oswal.
Ambuja Cements, however, said in its presentation that demand is likely to be driven by revival in real estate, promising 2022 crop outlook, India's infrastructure push and implementation of production-linked incentives to boost domestic demand.
The demand outlook also remains uncertain, according to JPMorgan. And it expressed doubts if the industry would be able to sustain such increases. The hike, the research firm said, could weigh on government project execution and impact the overall industry demand.