Stimulus package, lower costs to aid cement cos

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Mumbai: The reduction in coal and diesel prices will start seeing an impact on the financial results of cement companies in the third and fourth quarter of FY09 onwards, say experts. This easing of cost pressure brings some sign of relief for the 206.46 million tonne cement industry, which is already reeling under the pressure of falling demand and inventories being piled up.

Coal prices have dropped to $70 per tonne currently from $150 per tonne in June this year. In December, the government reduced diesel prices by Rs 2 on account of fall in crude prices. Hence, sequentially the industry will see cost pressures moderating. However, falling demand may hit companies’ top-line and bottom-line.

The only ray of hope seems to be more stimulus package by the government which is expected to boost cement demand.

HM Bangur, CMD, Shree Cement told FE, “We are hopeful about the new package that will be soon announced by the government. We hope cement imports will be banned; duties on coal and petroleum coke will be brought down to 0 from 5% currently and excise duty will be made uniform. This, if announced, will boost cement demand.”

Experts believe that all this will just support the falling demand, the impact of which will be visible in FY 2010.

Accepting that the cost pressures are easing, Bangur said, “This will only have marginal impact on cement companies, whereas, margins will continue to remain under pressure.”

The power and fuel cost contributes to about 22-25% to the total cost of production for cement companies. Coal, which is not only used to generate power but is also the key input in the cement production process had increased more than double in the last one year resulting in a substantial Rs 400 per tonne increase in the manufacturing cost of cement. Also, freight cost, which accounts for about 18-20% of the operating cost, had increased due to increase in diesel prices.

“The falling demand has forced cement players to run their plant at lower capacities. Volumes will be impacted and price correction will offset the cost pressure ease and stimulus package,” said Pawan Burde, an analyst with Angel Broking.

Moreover, the cement industry is also betting on affordable housing which is expected to pick up after the benefits are announced by the government for the real estate sector.