Can Indian cement demand survive rising production costs?

India's cement companies have reported a decrease in their margins in the first quarter of the new fiscal year due to several cost constraints. As cement demand is set to grow in the country, can companies see their profit expand?

A challenging first quarter

In the first quarter of the 2018-2019 fiscal year, cement manufacturers in India mainly reported a decrease in margins and net profit, which was attributed to a rise in prices for petcoke and freight rates. This happened with several companies, such as India Cements, Dalmia Bharat, Ramco Cement, JK Lakshmi Cement, and Shree Cement. Conversely, one of the largest cement manufacturers in the world, Ultratech, reported solid quarterly earnings, but the figures cannot be compared to the ones of the previous fiscal, as the company has since then acquired several cement assets from Jaiprakash Associates.

Although the cement industry was one of the few allowed to use petcoke, the material can now only be used during the cement manufacturing process, in the kiln, and had to be replaced with pricier fuels to provide energy, such as coal.

All of these extra charges added up to an estimated impact of nine to fifteen percent on the cement producersÔÇÖ margins, according to ICRA's calculations, and the road ahead remains murky for the manufacturers, despite an expected increase in cement demand.

Input costs on the rise

Some of the cement companies, such as Ramco Cement, reported a rise in sales during the period, while Ambuja Cement's and ACC's profits increased when compared to the first quarter of fiscal 2017-18. This happened despite the 28 percent Goods and Services Tax (GST) rate for cement products, one of the highest tiers of taxation, and mostly attributed to luxury goods. In part, this is due to an increase in demand, coupled with a rise in costs of energy and freight, as well as declines in cement prices in some of the regions.

Petcoke prices reached an all-time high during this period. Despite a ban on its use and import into India, the cement industry is allowed to use the product in its kilns during the cement manufacturing process. Most companies have switched to using coal for their energy needs, but prices were also pressured up by 30 percent during the quarter, and a rise of 21 percent in diesel prices translated into an increase in freight costs (...)

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