Coal Import Duty Cut: Implications For Cement Companies

Cement companies, which were reeling under the pressure of high fuel costs, have received a major relief in this year’s budget. This year, the Indian government has proposed to cut the import duty on coal from 5% to nil. This is a significant move to provide relief to power companies in the country, which are facing the problem of acute shortage of thermal coal.

Thermal coal, a primary source of energy used for producing cement, is also facing similar issues of coal shortage due to lower production from the coal companies and higher demand from the power sector. Although the consumption of coal for producing cement is low, it still remains a major cost component for cement production, constituting 15%-20% of the total cost of sales. Nearly 40% of the coal requirement is met through linkages with coal companies, while the rest is taken from open markets or through imports. Petroleum coke is also used, though it is priced substantially higher than linked coal.

The 5% reduction in custom duty will save the companies using imported coal approximately 1%-1.5% of their operating margins.  As per our calculations, the company will save around Rs 300-350 per tonne of cement production. This amount makes for good savings for the cement companies who import coal. Therefore, the rate cut on coal imports will definitely provide some relief on the margins front.

The cement companies have increased the cement prices three times from January 2012 onwards. The first hike was by an average of Rs 10 on the back of improving demand from the housing and construction sector. However, following the recent hike in freight rates by the Indian Railways, cement companies raised the prices by an average of Rs 10 and further by Rs 5 per 50 kg cement bag, and are currently selling at Rs 300 per 50 kg bag.

We believe that the increase in cement prices by the companies will not improve the margins significantly, as the 20% hike in freight costs will eat into the benefits of the price hike. Therefore, in the coming quarter, we may see a strong growth in the topline of the companies due to improved demand and higher realisations, but the margins will not see similar growth due to the hike in the freight costs, which constitutes a major portion of the overall cost of sales.