Rising fuel costs triggered by geopolitical tensions in West Asia may begin to pressure profitability in the cement sector, even as demand conditions remain robust and pricing trends uneven across regions, analysts said.
“Amid intensifying geopolitical tensions, imported pet coke prices (CNF basis) have increased approximately 11% month-on-month to around $135/tonne versus $120/tonne in February. Similarly, imported coal prices rose around 7% m-o-m to $110/tonne,” sectoral experts from Emkay said in a report, adding that these prices could rise further if tensions prevail.
Inventory Buffer Meets Rising Input Costs
However, since cement producers maintain fuel inventories covering roughly 30-45 days of consumption, the sector should be shielded from an immediate impact during the March quarter, the analysts added.
Experts expect the margin impact to begin surfacing in the following quarter if current fuel prices persist. “Assuming spot pet coke prices ($135/tonne) will hold, we estimate Ebitda/tonne to be hit by at least ~Rs 50 in Q1FY27,” analysts from Emkay said.
“Margin erosion could come into play, should fuel costs escalate amid geopolitical tensions, potentially inducing an FY23 deja vu (wherein fuel costs surged as a fall-out of the Russia-Ukraine war),” analysts from ICICI Securities said.
The spike in fuel costs has, therefore, emerged as a key near-term risk for the sector. Analysts suggest that in such a scenario the market will likely see price hikes by cement producers to offset the margin pressure. Some industry checks indicate that companies could attempt price increases of around `10 per bag across trade and non-trade segments if cost pressures sustain.
Regional Pricing Imbalance
Demand trends, however, remain positive, according to the experts. Channel checks across brokerages indicate that cement demand improved in February and is likely to remain firm through March, driven by construction activity and infrastructure spending. Several regions reported price increases of Rs 5-10 per bag in February, though some of these hikes were later rolled back as companies focused on pushing volumes. No major hikes have been observed in March so far, analysts said.
Recent data suggest pricing dynamics remain mixed. Non-trade prices in several markets have increased compared with earlier quarter exit levels, helping improve realisations in the March quarter. At the same time, competitive intensity continues to weigh on trade pricing in certain regions, particularly in the south, where the `10/bag hike taken in January was reversed amid weaker trade demand.
Industry profitability has already been sensitive to pricing swings in recent quarters. Realisations declined across regions during the December quarter due to price cuts and a shift toward bulk sales, even as volumes remained healthy. Sequential profitability also softened as pricing pressure offset benefits from higher demand.