Lucky Cements MoU with Oracle Coal Fields for the supply of indigenous coal from Thar, has confirmed that the firm has the ability to explore solutions in the face of tough market conditions by spreading its wings in the right direction.
Quite naturally, it is this trait, which has made the company not only the leader in terms of market share, but also a highly profitable one, compared to other local players. With high saturation in domestic market, reduction in FOB cement prices to $52 per ton from $80 per ton during the economic boom and escalating energy prices have forced local cement manufactures to look for recipes for survival.
In this regard, Lucky has been so far lucky, as it has taken some innovative steps: First, it capitalized on its plant near the port city in order, targeted export market and save transportation costs. Next, it started planning to expand its business into Africa amid capacity expansion and over supply situation in Asia. Finally, it is now eyeing indigenous coal resources to give relief to its profit margins.
Although, Lucky uses coal as an input and gas for power generation, spiraling coal prices have been pressuring the profit margins of other cement makers to a large extent as coal is used both as a key input for cement as well as for power generation.
According to company officials, if coal exploration at home is successful then they will use the commodity for power generation as well, as on an average both coal and energy account for 60 percent of their production cost. They say that the coal field currently under exploration by Oracle contains coal with low sulphur content, which is feasible for cement production.
Dependence on local coal will also reduce the companys exposure to exchange rate losses, since continuous depreciation of local currency has made imported coal expensive. It will also improve the firms cash cycle as easy access to local resources will help the company to maintain lower inventory levels than in the case of imported coal, for which manufacturers typically keep seven to eight months of inventory.
Cumulatively, these benefits can help bring down the cost of cement production as local cement manufacturers incur about $32 per ton (industry average) manufacturing cost - which is quite high in contrast to many Asian countries - while reducing the pressure on imports.
And far more importantly, Luckys inclination to use local resources may also boost exploration activities - motivating other businesses to follow suit.
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