Price cuts, input cost rise in May to hit cement cos, say brokerages

7 Jun 2022

A slack in demand last month led to cement companies partially rolling back the price hikes they had taken in April in key regions.

Further, spikes in petcoke and coal prices, a key input cost for the cement industry, continued in May and analysts expect this, along with subdued net price hike in Apr-May, to hit the operating margins of cement companies.

The average domestic selling price of cement declined 3% on month In May, with multiple markets seeing declines, on the back of weak demand, said brokerage Jefferies India in a report.

Average cement prices witnessed 3% on-month decline in May on account of a sharp 7% decline in the major region of North, followed by 3% on-month decline each in central and southern regions, according to brokerage JM Financial.

“Volumes in May slipped on MoM (month-on-month) basis by mid-to-high single digit, while remaining higher YoY (year-on-year) on soft base,” said Jefferies. The brokerage estimates cement industry demand for 2022-23 (Apr-Mar) to be in high-single digits, compared to around 8% increase in demand in 2021-22.

The key input costs were inching up materially, said JM Financial, with coal prices rising sequentially in May and average petcoke prices rising to around $390 per tonne in May from $360 per tonne level in the previous month and around $320 in March.

According to broker Motilal Oswal Financial Services the impact of sustained increase in energy costs will be felt by cement companies in Apr-Sep. Based on its channel checks, the brokerage estimated the Apr-Jun volumes to decline around 15% on quarter as against a historical on-quarter decline of 8-9% in the June quarter.

Jefferies India said that the price hikes announced by cement companies for June were limited to “very few” markets. As a result of price hikes not sustaining and input costs remaining elevated the brokerage said the downward risk on earnings estimates had resurfaced.

Analysts expect that the on-year volume growth in Apr-Jun to be high due to a low base and were, therefore, watchful of on-quarter trends which showed weakness.

Analysts are watching closely whether the Apr-May trends in prices, volumes and input costs will continue to worsen in the current month and result in a larger hit on the operating margins of cement companies.