Cement prices: Tug-of-war

Coal-starved China would pay any price for coal, so the country’s managers claim. The unlikely commodity that became very hot in the international market very fast has caused prices to skyrocket. Much has been written here on the subject in this space (“Cement’s coal play”, Oct 5, 2021). In the local context, major coal users like cement millers have been faced with a massive challenge. The outcome? Cement prices in various markets have not stopped rising.

Higher coal prices, higher freight and rupee depreciation have put considerably pressures on cement manufacturers to pass that inflating costs onto the consumer. But not entirely. In fact, based on current coal prices and the margins that cement manufacturers tend to keep (estimated by BR Research), cement manufacturers can raise prices by at least Rs132. So far, the average price increase between the start of September and now, stands at Rs28. For markets located in the north zone, these price increases are greater—for instance, Islamabad saw prices go up by Rs35 during this period. To be fair, price hikes have been gradual and no way as dramatic. Between Feb of last year till today, average cement bags cost Rs160 more.

It is likely that as long as domestic demand remains robust, cement manufacturers will continue to slowly raise prices to safeguard their thinning margins. They however also may have to face coal shortages soon which in turn may lead to cement shortages. On the other hand, if demand does not persist, it would become ever more difficult to keep steadfast on the current price escalation path which ultimately would lead to another cycle of losses after turning positive earnings during FY21.

The world may be trying to wean off coal and other dirty fuels but the current global demand pegged to China’s burgeoning want is not going anyway. While it was predicted that coal prices will simmer down in the first quarter of FY22, that didn’t happen. It could take a while.

For cement makers, the next expansion cycle is already upon it amid cost inflations, and rather subdued export demand. Expansions will lead to higher debt levels as the monetary policy committee plays with the policy rate to contend with growing inflation and bring it close to its target. That means leveraged books with high cost of production and higher borrowing expenditure. The major determining factor for cement companies will remain retention prices and the delicate tug of war that ensues as millers grapple with the swiftly evolving environment; confident in domestic demand and not confident in everything else.