Rising energy and freight costs because of higher prices of pet coke, coal and diesel are expected to impact margins of cement companies.
Rising energy and freight costs because of higher prices of pet coke, coal and diesel are expected to impact margins of cement companies. While most of the large cement companies (barring the south-based producers) were able to pass on rising costs in the first half the current fiscal, there could be pressure on the profitability and debt metrics of cement companies in the coming quarters given higher energy costs, said ICRA in a release on Wednesday. Prices of pet coke rose by about 32% in H1FY2018 on a year-on-year (y-o-y) basis. This, along with the 44% increase in coal prices, resulted in higher power and fuel expenses in the first half. Further, with nearly a 7% increase in diesel prices, most cement companies witnessed higher freight expenses during the period under review. “While the operating profitability of cement companies has been under pressure on account of the rising costs in H1FY2018, higher realisations supported margins to a large extent except for south-based players. However, with expectations of higher power and fuel and freight costs in FY2018 likely to continue, the same will put pressure on the profitability margins and debt metrics of cement companies in the coming quarters. Hence, the industry players’ ability to secure increases in cement prices remains critical from the profitability perspective,” said Sabyasachi Majumdar, senior vice-president & group head, ICRA Ratings.
In addition, the Supreme Court in November last year banned the use of pet coke in a few northern states to curb the rising pollution levels, increasing most cement companies’ dependence on coal. And while this ban was been relaxed in December, a future ban and the resultant adverse impact on the cost structure of cement companies cannot be ruled out, Majumdar added. Based on current trends, demand is expected to show a very timid growth of 1-2% in FY2018 and show a modest recovery only from Q4FY2018 onwards. Cement demand remained weak in recent times because of sand shortage, slowdown in real estate activity, drought (in a few southern states) and transitional issues related to implementation of structural reforms such as the Real Estate Regulatory Authority (RERA) Act and the goods and services tax (GST).