Cement prices to rise 6% to 13% in India in FY23

Cement prices spike imminent

by 5paisa Research Team Last Updated: Dec 11, 2022 - 07:02 pm 32.1k Views
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If the results of ACC, the only large cement company to have declared quarterly results, are any indication, then input cost pressures and depleting margins are really pinching cement companies.

There have been several price hikes in the recent past and now it looks like this year we may see more instances of price hikes. After all, there is only so much of cost inflation that cement companies can absorb in their books. Rest has to be passed on.

During the current year, it is expected that prices of cement would be hiked by 6% to 13% to take care of these higher input costs. There has been an all-round increase in input costs.

For example, there has been a rampant rise in the prices of imported coal, pet coke and crude oil. While the trend was already visible, it has been aggravated by the Russia-Ukraine conflict. The supply chain bottlenecks and sanctions are worsening matters.

You just need to look at some of the input cost hikes till date. To take an example, coal and petcoke prices have increased by 30-50% in the last 6 months. This is unprecedented and the cement producers and consumers were just not prepared for that.

According to CRISIL, cement prices have touched Rs.390 per bag on an average at an all-India level, and going ahead another spike of Rs.25-50 across regions in April 2022 is par for the course.

For the manufacture of cement, the most important raw materials are coal and pet coke. Both go into the making of clinker, which then becomes the critical input for the manufacture of cement. All these inputs like Coal and pet coke have large supplies in Russia.

However, with the Black Sea embargo, the export of minerals and input from Russia have stopped. Other suppliers like Indonesia and Australia are not able to handle the shortfall.

There is more to the input cost syndrome than just coal and pet coke. The cost of petroleum products like petrol and diesel prices has gone up substantially in the national and global markets.
 

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This has a secondary impact on almost every possible product and service that goes into cement manufacturing including packaging materials, transportation and distribution, fuel, power and freight. That has been a big hassle for cement companies.

A lot of the price hike happened after the breakout of the Russia Ukraine war. For instance, since the war, crude has rallied by 21%, international petcoke has rallied by 43% while the freight costs have also gone up sharply.

In fact on a YoY basis, the price of crude is up by 80% while the price of imported petcoke is more than double. All these factors have put tremendous pressure and forced cement companies to hike prices. 

The good news is that cement demand is likely to remain robust in FY23 on account of solid demand for affordable housing in Tier-2 and Tier-3 cities. In fact, cement volume growth is expected at 5% to 7%.

However, if construction costs escalate beyond a point, then the demand may be postponed, if not eliminated. To avoid such an eventuality, the cement prices are likely to be hiked in a graded manner rather than steep increases. 

According to estimates, the spike in the price of coal and petcoke have spiked the cost of manufacturing cement by about Rs.75 per bag. That is not the kind of cost spike that cement companies can really absorb amidst thin margins that they are currently living with.

Most of the cost hikes happened in the last 2-3 months. However, the big challenge for the cement companies will be to draw that delicate balance between costs, price and demand. Not to forget, the CCI is already breathing down their necks with cartelization allegations.

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