The rising fuel prices in the wake of Russia-Ukraine tensions will hurt Indian cement makers, which are already reeling under rising costs of raw material and energy. The price of Brent crude jumped 3.08% a barrel to $110 on Thursday The power and fuel costs of major players — Ultratech, Ambuja and ACC — have jumped by 39%, 58% and 26% in December quarter. Fuel prices will also affect the logistics costs of companies, which are struggling with lower demand.
Russia-Ukraine War is causing havoc on Indian cement companies. Here's what's going on
Energy and logistics costs together are around 60% of the overall costs of cement makers. Raw material costs add up to around 13-15%. The energy cost of Ultratech, which is the largest cement manufacturer with 114.55 million tonnes per annum (MTPA) production capacity, shot up 39% year-on-year to ₹1,327 a tonne in December quarter.
Logistics costs increased 4% annually to ₹1,229 a tonne. Raw material costs — fly ash and gypsum — increased 7% year-on-year (YoY) to ₹538 a tonne. Sales volume slipped slightly by 3% to 23.13 million tonne (MT).
Coal Prices Skyrocket
At present, imported coal prices are significantly higher than their peak in October 2021 (e.g. South African coal price stood ~USD300/t v/s its peak of USD248/t). Petcoke prices too have started to rise. There will be a further increase in domestic/imported petcoke prices as cement companies would want to maximize the usage of petcoke.
Apart from higher coal/petcoke prices, the recent increase in crude prices/ocean freight rates may further put pressure on operating costs for the industry. Higher crude prices may lead to a rise in diesel price, which will lead to higher freight costs (a 5 per cent change in diesel price to impact opex by around ₹20).
There has been a substantial increase (up 75 per cent/52 per cent) in South African/ Australian coal prices in the last one month (40-50 per cent increase in two weeks).
For Ambuja, which has 31.45 MTPA capacity, the freight and forwarding cost has come down by 4.5% to ₹1,178 a tonne in the December quarter, however, fuel cost increased 58% to Rs1,572 a tonne. Raw material costs were up 7.9% to ₹408 a tonne.
The sales volume of cement and clinker has increased marginally to 7.2MT from 7MT. Ambuja's subsidiary ACC has witnessed its power and fuel costs rise by 26% to ₹1,165 a tonne in October-December.
It has reduced the freight and forwarding cost by 1% to ₹1,234 a tonne. Raw material costs increased 13% to ₹490 a tonne. However, cement sales volume increased by just 1% to 6.57MT.
Ambuja plans to enhance its capacity to 50 million tonne (MTPA). With the current ₹3,500 crore investment for adding 7MTPA capacity in East India and completion of its ongoing 1.5 MTPA grinding unit in Punjab, Ambuja is expected to achieve 40 MTPA by mid-2024. It has a strong balance sheet with cash of ₹4,000 crore.
Jeffries said in its recent report that Ambuja management remains optimistic about improving macro and government capital expenditure. The long-term demand for the cement industry is on a strong footing driven by increasing population and urbanisation, it added.
Key cost items like coal will continue to increase in the international markets, while diesel prices will be ballooned with Russia-Ukraine tension. In India, the prices of fuel are expected to move up post assembly elections.
The Stock Price Crash
Ambuja Cements has dropped as much as 22 per cent in past one month. The stock traded close to its 52-week low of ₹273.95 touched on March 19, 2021. In the December quarter (Q4) the company’s margin contracted by 651 bps quarter-on-quarter (QoQ), 660 bps year-on-year (YoY) to 15.2 per cent on account of higher fuel prices and flat realisations. Earnings before interest tax and depreciation and amortization (EBITDA) declined 26 per cent YoY at ₹568 crore impacted by unprecedented increases of fuel prices. Revenues were up 6.3 per cent YoY to ₹3,735 crore.
ACC's December quarter EBITDA of ₹5,600 crore is down 21% due to higher costs. The total costs per tonne rose 6% QoQ and 8% YoY, thanks to a sharp increase in fuel prices, said ICICI Securities in its report.
However, ACC's capacity expansion is on track. The 2.7MTPA clinker unit at Ametha, Madhya Pradesh, along with 1MTPA grinding unit may get commissioned by December 2022.
The 1.6 MTPA grinding facility at Tikaria is likely to be commissioned by June, said analysts with ICICI Securities. Balance 2.2 MTPA at the Salai Banwa, Uttar Pradesh, the grinding unit may go on stream by early 2024.
Impact on the Housing sector
Property consultant Knight Frank, said that housing prices in India will rise by 5% in 2022.
After facing a series of structural reforms like demonetisation, GST and RERA during the last decade, the pandemic arrived as another blow for the real estate sector. Their decade analysis of the2011 to 2021 period indicates many of the supply and demand-side factors have started putting upward pressure on house prices and as a result, They project around a 5% price increase in 2022.
This assumption from the property consultant comes at a time when many developers fear that increase in prices of raw materials such as cement and steel may lead to a price hike of 10-15% in near future.
Realtors' apex body Credai had recently expressed concern that if the prices of raw materials do not start decreasing in the immediate future, there is a high probability that the prices of residential properties will go up by 10-15% to offset the increased cost of construction.
Knight Frank in its report also said that residential sales momentum is expected to continue in 2022 as prospective homebuyers' preferences for bigger homes, better amenities and attractive pricing will keep them interested to seal the deals.
The disruption caused by the pandemic is slowing settling and the real estate market is expected to gain back its rhythm in the next two to three quarters, albeit, the threats of the new variant are adequately contained with minimum disruption in the early part of the new year," Shishir Baijal, Chairman and Managing Director at Knight Frank India said.
In the past one month, the stock price of Dalima Bharat, JK Cement, Ambuja Cements, JK Lakshmi Cement, Birla Corporation, UltraTech Cement, Prism Johnson and Heidelberg Cement India declined between 15 per cent and 25 per cent, after the companies reported weak operational performance in December quarter unfavourably impacted by a very steep escalation in fuel prices coupled with subdued demand in multiple regions.