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Setbacks for Indian cement industry

World Cement,

Recent developments are cause for concern in India

India’s cement industry has suffered two major setbacks recently. The largest domestic supplier of coal to cement plants, Coal India Ltd, recently increased their prices by 30%. In addition to this, the government’s 2011 Budget outlined a 2% hike in excise duty for the already suffering cement sector. The two setbacks are likely to reduce profits in the upcoming year.

Despite a bad performance during the last four quarters, the cement sector had started to turn around since December when the industry saw a gradual increase of demand, in particular from the realty sector. This has led to a price expansion of Rs30 – 40 per bag of cement across the country.

Increase in domestic and international coal prices

Reports from February seemed promising, with companies such as ACC Ltd, Ambuja Cements Ltd and UltraTech Cement Ltd revealing growth. Analysts seemed confident in improved earnings over the next two quarters. However, as cement plants in India rely mostly on domestic coal mines for their supply, the steep increase in the price of coal is likely to have an adverse affect on the industry. The additional coal supplied is from international and spot markets. The international coal price inflated to US$115/t (Rs.5175/t) from US90/t at the start of 2011.

A senior official at India Cements Ltd confirmed that the approximate Rs.650/t increase on top of the earlier Rs.2300/t price of coal, would lead to added financial pressure for the company. There are additional fears that the cement companies do not have the operating leverage to offset this new financial pressure, as many companies have a low capacity utilisation of 65-70%.

A report from Emkay Global Financial Services Ltd states, “we estimate power and fuel cost for the industry to be 6.5% higher than the Q3FY11 (quarter ended December) levels.” Analysts’ consensus reveal ACC, Ambuja and UltraTech as being hit the worst by the rise, as these companies have the highest figures of coal obtained from Coal India Ltd.

Additional duties imposed

The cement industry will now be forced to pay an extra Rs.4 – 8 per bag of finished product, on account of the country’s finance minister Pranab Mukherjee having imposed a 10% ad valorem duty of Rs.160/t on cement bags above Rs.190 per bag.

This will mean an increase of at least Rs.8 – 10 selling price per bag, to ensure a maintained profit margin. This poses its own challenges as the industry can hardly be described as booming. It will be difficult to pass on all of the costs to the end consumer, considering the surplus capacity and recent price hikes.

This could then potentially lead to additional pressure on margins—cement firms’ costs increased nearly 12-15% in the December quarter as a result of higher fuel, freight and material costs.

The cement industry can seemingly only be saved by an increase in demand. Recent figures show a low 6-7% demand growth for the first couple of months in 2011. This suggests therefore, that although cement prices are predicted to hold at current levels, a significant recovery in the profit margin is far off in the future.

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