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Cement companies have been battling severe input cost pressures for the past few quarters. Manufacturers failed to adequately hike prices because of low demand, thus keeping their operating margins under pressure. However, investors in cement stocks can now heave a sigh of relief as petroleum coke, or pet coke, prices have started to ease.
The average US pet coke price fell 10% month-on-month (m-o-m) in June to $245/tonne and a similar drop was reflected in the domestic pet coke price in July, pointed out analysts at ICICI Securities Ltd in a report on 4 July. As the chart alongside shows, domestic pet coke prices have fallen from ₹22,473/tonne to ₹20,114/tonne in July.
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Some large companies have also started sourcing coal from Russia, which is available at a 20% discount on a landed-cost basis, said the ICICI Securities report. Power and fuel costs account for 25-30% of the sector’s total operating cost.
This is a positive from a medium-term perspective, but Q1FY23 earnings performance for the sector is likely to be muted, especially on the margin front.
The decline in coal and pet coke prices will reflect in operating margins with a lag of a few quarters, according to Ronald Siyoni, assistant vice president, research, Sharekhan by BNP Paribas. “We expect margin improvement led by lower energy costs to be visible from H2 FY23. The extent of margin improvement would depend on the mix of fuel used—imported or domestic coal, imported or domestic pet coke and alternative energy fuel usage,” he said.
Meanwhile, the trend in cement prices is discouraging. Dealer channel checks by brokerages showed cement prices declined from May to June across regions. Against the backdrop of high input costs, a drop in cement prices would mean unimpressive realisations growth.
“Our interactions with dealers, sales executives, and clearing and forwarding agents in the cement sector revealed that after a subdued May, cement firms attempted price hikes in early-June but barring a few markets with flat prices, other markets registered a further dip in June,” Elara Securities (India) Pvt. Ltd said in a report on 28 June. As a result, the all-India average retail cement price corrected by ₹11 per bag m-o-m to ₹379 in June. One bag weighs 50 kg. Market intermediaries do not expect a price hike in July because of seasonal weakness with the onset of monsoon, the Elara Securities report said.
In simple terms, this means that for margins to see a meaningful improvement, the sector will need to see sustained fuel price reduction.
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