India's Cement Industry Reports 17% Increase in Production Costs

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Researched by Industrial Info Resources (Sugar Land, Texas)--According to the unaudited results declared by India's cement manufacturers for the first half of the current fiscal year, the industry is facing the heat on its earnings margin because of increased costs of coal, fuel and power. Nine major cement companies that control 65% of the country's market reported a 17% increase in the cost of production in the second quarter of the current fiscal year, bringing the price of cement to $2.83 per 50-kilogram bag.

Cost of power and fuel accounts for 60% of the production costs of the cement industry, with coal contributing 30% of the costs. The cost of power and fuel surged 33% to $1.85 per bag as a result of the rising prices of coal and coke. Rising diesel prices increased freight costs by 7.4% to $0.62 per bag. Prices of raw materials such as fly ash and gypsum rose by 12%. Interest charges for the quarter also rose by 84.5% year-on-year from higher interest rates on debts incurred for capital expenditure.

Demand for cement is expected to slacken as high interest rates and a liquidity crunch plague investments in the real estate and infrastructure sectors. The situation is expected to worsen with the likely addition of 90 million tons of capacity during the next three years, leading to a surplus scenario in the future. This will put additional pressure on cement companies in terms of sales, earnings, margins, profitability and realization.

India Cements Limited (BOM:530005) (Chennai, Tamil Nadu) plans to invest over $32.8 million to set up two captive thermal power plants with power generating capacities of 20 megawatts each in a bid to insulate itself from the growing cost of power. Increases in the prices of coal and fuel dented the firm's net profit by nearly 40% in the second quarter of the current fiscal year compared to the corresponding period last year.

Earlier this month, NTPC Limited (BOM:532555) (New Delhi) invited expressions of interest from cement companies to partner with NTPC in setting up four units to manufacture cement from fly ash generated from NTPC's power plants. Final plans are being drawn up to determine the model of the proposed joint venture. In addition to supplying fly ash at a predetermined price, NTPC is also likely to make investments in the proposed cement units. Shree Cement Limited (BOM:500387) (Kolkata, West Bengal), which has already submitted its expression of interest, is also in discussion with NTPC to set up a grinding unit with a capacity of 1 million tons per year to supply clinker. Shree Cement is exploring suitable locations in the northern states of Haryana, Rajasthan and Uttar Pradesh to set up the grinding unit in proximity to NTPC's unit in New Delhi.

NTPC also announced that it would set up two more cement plants in partnership with private sector players through the formation of a 26:74 special purpose vehicle with Shree. NTPC generates about 95 million tons per year of fly ash from its various units. This is expected to increase to 170 million tons by 2010. The firm uses fly ash produced from its 16 power plants for the manufacture of asbestos products, ash bricks, ash blocks and ready-mix concrete, land filling, and for the development of embankments, roads and building products.

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