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Cement companies may soon get relief from anticipated margin pressure

ICICI Securities 17 Mar 2022

What Buzzing:

The recent surge in international coal/petcoke prices has led to huge uncertainty in terms of costs and margin recovery for cement companies.

Context:

International coal prices have seen a sharp uptick with South African coal doubling to $446 in just first 10 days of March amid Russia-Ukraine crisis. Currently, the spot rate of international coal is hovering at ~$325/tonne, still up 79% from Q3FY22 exit rate and 3.8x higher YoY. Petcoke prices are also up over 100% YoY, 11% QoQ.

Our Perspective:

On a per tonne basis, every $10/tonne rise in fuel cost has a cost impact of Rs 3-3.5/bag for cement companies. Hence, additional price increase of Rs 35-40/bag is required just to offset the incremental cost impact of P&F costs. Considering price hikes of Rs 15-18/bag taken so far, we expect cement sector margins to decline 98 bps in Q4FY22E and further by 498 bps to ~18% in FY23E. This is if international coal prices stay elevated as power & fuel accounts for 27% of total costs. Despite these cost challenges, we maintain our positive stance on the sector from a long-term perspective as the current elevated levels of international coal/petcoke prices are unsustainable in our view. The one-month forward contract of international coal (Richard Bay) for April 2022 now indicates sharp cuts in coal prices. It is trading at $220/tonne vs. the current rate of $320-325/tonne. Hence, going by this trend, if the spot rate of international coal also begins to cool-off to a normalised level on easing of geopolitical tensions or improved coal supplies then this would bring much needed respite to all cement companies to overcome cost related challenges in H1FY23E only. Further, the strong gross budgetary support for infra in the recent Budget and favourable state election outcome would continue to boost infra demand while a pick-up in urban real estate along with good Rabi-crop season will keep retail demand healthy in the next fiscal year also.

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