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Diesel’s drag on worldwide cement recovery

World Cement,

The forecast for cement worldwide is mixed at best. According to the Portland Cement Association, US cement is expected to grow 9.7% y/y in 2014 and 2015. China’s growth will slow to 4.9%, yet consumption will approach nearly 60% of global demand in 2014 according to CW Research. Other countries are projecting much lower growth as economic conditions in markets such as Europe remain poor. India is expected to see moderate growth, but less than previous forecasts as its economy has slowed as well.

Regardless of the forecast for cement, every country has seen domestic diesel prices rise over the past few years, which has affected input and transportation prices. Resulting in higher cement costs, this has helped to dampen growth worldwide. High fuel prices, however, are not the only problem slowing growth. In countries where prices are allowed to respond to market forces, volatile fuel prices have also proven burdensome. Geopolitical, economic and other factors cause daily price movements that make fuel budget and procurement decisions difficult.

In the US, volatility has been a challenge for a number of years. Since 2004, daily wholesale diesel price movements of US¢3 or more per gallon have occurred 44.5% of the time, US¢5 or more 21.6% of the time, and US¢10 or more 3.6% of the time. Prior to 2004, movements occurred a mere 4.8%, 1.4% and 0.2% of the time, respectively. As Martin Marietta Materials confirms in its 2012 annual report, diesel represents the largest portion of energy costs within aggregates. Buying at the wrong end of a price swing can have a direct impact on profitability.

When prices are government controlled, the impact of volatile fuel prices is absorbed through government-sponsored fuel subsidies. In many cases, fuel subsidies cause a significant drag on the economy. According to the IMF, India’s fuel subsidies comprise approximately 2% of its GDP. In effect, governmental economic engineering just pushes the problem around, but it does not solve it.

Whether boom times or bust, free market or government mandated, every cement company can benefit from taking greater control over the impact of volatile diesel fuel prices. With over 10.5% of fuel sold in the US flowing through fuel management automation software and services, as well as customers like Carmeuse and Dyno Nobel, FuelQuest has developed a unique and leading-edge perspective on how companies can tackle the issue of diesel costs. The following are some specific examples of how to do just that:

Achieve balanced supply portfolio

  • Fuel market volatility presents opportunities for gain and loss. Single supplier relationships in a market of optionality limit a company’s ability to take advantage of gains and avoid losses. Multiple supply relationships with varying payment terms and different indices can provide a company with the ability to capitalise on fuel market movements. On average, companies should aim for 80% contracted and 20% spot market.
  • Cement companies will often turn to fixed price contracts. These can help with budget predictability, but they can also negate opportunities to take advantage of profitable price swings, as well as cause higher fuel costs.

Take control over inventory

  • Fuel is an expensive asset. Getting it to storage tanks without incurring loss, stock-outs, or stock-fulls is challenging for companies. Fuel management automation can create greater security of supply and detect when losses occur. With 65% of fuel loss happening between the terminal and the tank, for instance, software and services can pinpoint issues quickly and provide remediation guidance.
  • Automation software also gives fuel managers the inventory transparency and forecasting accuracy they need to make load-shifting decisions taking advantage of timely market-buying opportunities.

Measure and review fuel management operations

  • Operational improvement starts with a baseline of existing processes and performance. Third-party fuel management expertise from logistics companies such as FuelQuest can help establish this baseline and uncover areas of operational gain.

Profitability within cement is affected by a litany of factors – many of which rest outside the direct control of a company. However, cement companies can exert significant control over internal costs, starting with fuel. The items in this article are merely first steps to gaining operational control over fuel costs and its twin price volatility.

Written by Ryan Mossman, Vice President and General Manager of FuelQuest’s Fuel Service.

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