After rising to ~Rs 390 per bag over the past 12 months, domestic cement prices are set to climb another Rs 25-50 across regions in April as manufacturers start to pass on rising costs due to the Russia-Ukraine conflict.

Among others, Brent crude oil prices rose ~21% on-month to average $115 per barrel in March and ~24% sequentially in the closing quarter of last fiscal. For the full fiscal, the prices were up ~79% on-year

Moving in sync with crude oil, international petcoke prices, which had begun easing between December 2021 and February 2022, shot up ~43% on-quarter in March. Last fiscal, US petcoke prices were up ~96%. Domestic petcoke prices (Gujarat ex-refinery) have followed suit, rising ~26% on-month in March and ~21% on-month in April.

International coal prices have also skyrocketed as three headwinds coalesced: 1) supply constraints due to the Russia-Ukraine conflict, 2) weather disruptions in the key mining areas of Australia, and 3) Indonesia’s ban on coal exports to meet domestic demand. As a result, prices of Australian coal (up ~157% on-year in fiscal 2022) surpassed the $300-per tonne mark in March and were ~35% higher sequentially in the fourth quarter. Though prices have corrected from the recent peaks, they are expected to remain sticky in the near term.

The resultant surge in power and fuel costs, in turn, has raised the cost of road freight, which accounts for ~50% of cement transport. Bulk use diesel prices have been hiked by Rs 25 per litre, while retail diesel prices have been increased 14 times since mid-March, taking the total increase to Rs 10 per litre.

All this has exacerbated the cost pressure and cast a shadow on demand.

Says Hetal Gandhi, Director, CRISIL Research, “Demand increased ~20% on-year in the first half of fiscal 2022, but experienced an unexpected slowdown in the second half due to unseasonal rains, sand issues and labour unavailability, which pulled it down to ~7% on-year growth for the full fiscal. In fiscal 2023, cement volume growth will be stable at 5-7%, driven by affordable housing demand from tier-2 and tier-3 cities, along with infrastructure. However, high construction costs will limit the demand uptick.”

To be sure, after a slowdown in January and February this year, the industry saw volume recovery in March, supported by volume push to meet year-end targets. Volumes picked up across regions, though actual demand trends remain a monitorable as escalation in construction cost is expected to weigh particularly on cement demand in the cost-sensitive rural housing segment. For the record, housing accounts for nearly 60% of cement demand.

That said, pent-up demand from prior quarters and lower volume offtake in the first quarter of fiscal 2022 due to the pandemic’s second wave have built a low base for sequential as well as on-year demand growth in the first quarter of fiscal 2023.

Beyond this quarter, the extent of the government’s capital expenditure (capex) remains to be seen as the economy recovers from the ‘crude’ shock amid geopolitical problems. The budget documents of 19 states indicate a 4.8% increase in state capex on sectors where cement is an input (roads, irrigation and housing).

Says Koustav Mazumdar, Associate Director, CRISIL Research, “Geopolitical disruptions intensified cost pressures in the fourth quarter of fiscal 2022. While an increase in prices is inevitable to partially mitigate the impact of increase in power, fuel and freight costs (50-55% of total costs), there will still be a dent on profitability. Our estimates indicate a margin contraction of 400-500 basis points (bps) in fiscal 2022 and a further 100-200 bps this fiscal.”

The fourth quarter of fiscal 2022 saw a marginal uptick in costs sequentially due to low-cost inventory. A bigger impact of input cost hikes will be felt in the first two quarters of fiscal 2023. The only recourse, therefore, is an increase in prices, though whether these sustain, and which way demand moves remain to be seen.

Annexure