Cement makers ease their way for Q3 with price hike

Cement producers face a hit on demand due to local issues like second wave of COVID-19 pandemic, heavy rainfall in many areas and transporters’ strike. The increased cost of raw materials like petroleum coke (pet coke) and increased freight cost also impacted the performance of the industry.

Analysts said domestic pet coke prices rose nearly 90% year-on-year (y-o-y) and 22% sequentially in Q2FY22. Inflation in imported coal prices was sharp with an almost 150% year-on-year jump and 45% quarter-on-quarter (QoQ) growth. This affected several cement companies which import fuel. Investors would agree that cement companies have now opted for employee rationalization and promotional costs to save margins. With economic activity resuming, costs are also making a comeback and fixed overheads remain high.

However, cement manufacturers have recently started increasing the prices following the increase in demand. The latest dealer channel check by IIFL Securities Ltd showed that cement prices have increased since the beginning of October. “All India average cement price increased by 4.6 per cent qoq in Q3FY22 (so far), or 15 per bag and 7.5% as compared to the price at the end of September,” the domestic brokerage house said in a report last week.

“Within regions, price growth (from Q2 average) is highest in South (+8.5%), followed by North (+6%), West (+5%) and Central (+4%) . . . in the past, the average price is still 2.5% lower than the second quarter average. However, it has improved by 3% (the lowest increase among regions) since the end of September.” A cement bag weighs 50 kg.

Management comments from major cement manufacturers in the September quarter showed demand growth from Q3FY22 driven by revival in housing, infrastructure projects and commercial and industrial construction activities. This has given confidence to the cement companies to increase the prices. Housing is the biggest driver of demand, contributing more than half of total cement sales.

What’s more, there has been some moderation in raw material prices in recent weeks, which adds to the comfort. Analysts at Nirmal Bang Securities Ltd said the Chinese government’s action on coal speculation has led to a fall in global coal prices, which bodes well for Indian cement companies. “India witnessed a coal shortage, with reports of coal stocks reaching new levels in power plants. Due to non-availability of domestic coal, costlier than imported coal and pet coke costlier with limited availability, cement companies were facing fuel shortage or astronomical increase in cost,” it said in a report.

With coal prices declining from recent highs, a major cost overhang will be removed. While the situation is still volatile, analysts at Nirmal Bang said that coal prices may not rise again in the near future.

Meanwhile, an analysis by IIFL showed that volumes of 21 listed cement companies grew nearly 6% in Q2 of FY22, while there was a marginal decline sequentially in the seasonally-weak September quarter. “Even on a two-year CAGR basis, volumes grew by 6% p.a. in Q2FY22, reflecting normalcy in economic activities,” the IIFL report said. CAGR is short for Compound Annual Growth Rate.

Further, cement volumes grew by around 24% in H1FY22, aided by a lower base due to the lockdown effect, and around 3% on a two-year CAGR basis, including the impact of the second Covid wave this year , has been added to the IIFL report. , Volumes are expected to strengthen, aided by deficient monsoon and improvement in infrastructure and housing-related activities, shows dealer checks.

That said, following the recent rally in cement stocks, a meaningful bounce will depend on the volatility in input prices and the speed at which cement companies are able to raise prices to negate the impact of cost inflation. However, analysts cautioned that the price hike should be gradual and should not affect the recovery in demand.