Coal to burn a hole in cement cos? pockets

Despite the strong recovery in cement prices during the quarter ended March 31, 2010, Indian cement companies are expected to report muted results due to increase in cost of coal and fall in volumes witnessed by some firms.

Cement prices in the past three months have rallied on a sequential basis, owing to the seasonal pick-up in demand. However, the firms? average realisation during the quarter improved only marginally as coal and power costs witnessed some upward pressure during the period under review.

According to a recent IIFL report, the average coal prices in the global markets rose by 25% year-on-year in the March quarter and domestic linkage coal prices also increased by 10% since mid-October 2009. The increase in cost was not passed on, so we expect them to reflect in fourth quarter Ebitda margins of the cement firms.

Prices of imported coal rose from $55 per tonne in September to $81.67 per tonne, up by 45%. Though this is still below January?s figures of $91, manufacturers like UltraTech Cement, Ambuja Cements, India Cements and Binani Cement, who depend on imported coal, may face pressure on Ebitda margins.

Binani Cement MD Vinod Juneja had earlier told FE: ?The rising price of coal has hit the cement industry. We will see some impact on margins from the first quarter of FY11 onwards.?

According to a Credit Suisse report, for quarter ended March 31, 2010, Aditya Birla Group?s Grasim is expected to report a 60% y-oy increase in profit after tax (PAT) on the back of strong volumes, better pricing and lower costs in the viscose staple fibre (VSF) business. However, group company UltraTech?s PAT is expected to decline 28% on lower cement pricing and higher coal costs.

For Holcim Group companies, while Ambuja Cement is expected to report a 14% year-on-year increase in PAT on lower coal costs, ACC?s PAT is expected to decline 9% year-on-year on account of lower volumes. Similarly, India Cements PAT is also expected to fall by 55% on account of 19% year-on-year lower realisation.

?Cement capacities aggregating 30 mtpa have commenced output in the past 3-4 months, say industry sources.

ACC chairman NS Sekhsaria had said: ?2010 is expected to see cement capacity of about 70 million tonne in the country, which is likely to intensify competition.?

ACC grew just 2.3% in the year ending December 31, 2009, compared to the industry growth of 10.3%. Its despatches from 2009 onwards have been be very low compared to competitors Aditya Birla Group and its sister concern Ambuja Cement. For the January-March quarter too, ACC is expected to report a negative volume growth of 2%. Ambuja is expected to report a volume growth of 7% and improved realisation, due to higher exposure to the northern markets. India Cements? volume growth is expected to be 27% year-on-year on new capacity commissioning.

Going forward, due to pick-up in the urban construction and real estate activity, cement companies? volumes are expected to improve sequentially. However, with stabilisation of the new capacities, the supply is expected to surpass the incremental demand, putting pressure on utilisation and consequently, on cement prices.