The sharp increase in raw material prices will continue to impact cement manufacturers, as they have only taken modest price hikes so far. FE has learned that the companies are planning to take calibrated hikes starting this quarter to pass on the higher cost of raw materials.

Cement prices recorded a Rs 15-17 per bag increase from January to February at an all-India level, peaking at Rs 390 per bag. However, prices marginally fell (Rs 3 per bag) in March to Rs 387 per bag, on the back of volume push by companies to meet year-end targets. In April, cement companies hiked prices by Rs 20-50 per bag across regions to mitigate cost increases.

“Cement prices are likely to increase further as players pass on the rise in input costs to consumers. The cement price hikes have been lagging behind cost inflation for the last six months, which dented the profitability of the sector. Hence, price rise becomes inevitable to limit further margin contraction,” Hetal Gandhi, research director at Crisil said.

“On an annualised basis, prices are expected to rise by Rs 12-15 per bag in fiscal 2023 over fiscal 2022. While sharp hikes are expected in the first quarter, prices are expected to moderate with the onset of the monsoon along with the cooling of input costs,” Gandhi added.

Global coal prices, which shot up by about 35% in the fourth quarter to touch $320 a tonne after multiple ascends during the last financial year, pushed the per tonne cost of clinker production up by 2-2.5 times. The prices of global pet coke rose by over 50% in March, compared with the average prices recorded during December-February and that of the domestic variety rose by about 22% in March (from December-February).

The prices of domestic pet coke further rose by 21% in April on a month-on-month basis. Further, an expected increase in logistics costs would play a part. Cement manufacturers use pet‐coke and imported coal as fuel in kilns for clinker (a raw material) production and thermal coal for power. Power, fuel and freight costs account for about 55-60% of the industry’s total operating costs.

“Cement prices are expected to see an upward trend in the next two quarters. The fourth quarter of last year already witnessed this trend. Increases in input costs are far too dominant for companies to cover the cost using productivity as a lever,” Sudeep Mehrotra, managing director at Alvarez & Marsal said.

“The industry is in a unique situation. Volumes for almost all companies have increased in the last few quarters, which is about 8-10% higher than the pre-Covid period. However, market leaders in almost all geographies, except the south, are operating at 65-70% utilisation. Hence, the price increase has not been natural. This has led to a below-par financial performance for most companies in the last two-three quarters,” Mehrotra said.

However, the major constraint to price hikes is muted demand as construction costs rise. There has been an increase in the cost of materials such as steel, aluminium, copper and sand, leading to a rise in construction costs by more than 30-40% over the last two quarters. Further, the onset of the monsoon would also delay construction projects.

“Cement companies usually hold 2-3 months of raw material inventory and the impact of recent cost hikes would fully reflect in Q1FY23. Overall, we believe in FY23, costs will not be fully offset by the price hike, resulting in 100-200 basis points on-year contraction in Ebitda margins,” Gandhi added. However, others differ.

“In my view, cement prices will remain stable. This is on the back of a fall in production of the commodity due to reduced demand as many of the infrastructure and construction projects were put on hold. Further, with expected ease in tension in the Russia-Ukraine crisis, the global prices of coal and oil will also come down, which would also reduce the impact on input costs,” said VR Sharma, managing director, Jindal Steel and Power (JSPL).

JSPL produces cement from its 1 million tonne plant at Raigarh in Chhattisgarh and sells under the brand name Jindal Panther.

“Cement companies are now increasingly using blast furnace slag to make cement, which is cheaper than clinker by 30-35%, which is also helping in reducing production costs,” Sharma added.