Thursday, January 5, 2012

>INDIA CEMENTS: Coal costs to move up; price increase needed

Coal India Ltd., domestic supplier of coal to cement manufacturers in India, has switched to a new pricing regime from Jan 1, 2012, as per media reports (The Economic Times, 2nd Jan 2012). At this moment this change is on a trial basis and the final change may take place in1QFY13F.

The new pricing regime suggests that the notified price of coal would be directly linked to the Gross Calorific Value (GCV) instead of Useful Heat Value (UHV), which used to take into account the ash content. UHV is typically 12%-35% lower than the GCV for grades D,E,F of coal, according to our Coal India analyst, Anirudh Gangahar. The number of slabs for coal pricing has increased from 7 to 17 while the prices have been hiked sharply with erstwhile grades C,D,E,& F witnessing the highest price increases in the range of 25%-81%.

For cement companies on an average 50%-70% of the coal requirement is sourced from Coal India on average with India Cements and ACC being outliers with 30% and 80% of coal sourced domestically respectively. Cement manufacturers typically use imported coal and higher grade Coal India coal to fire their kilns while using lower grade domestic coal in the captive power plants. Thus the larger impact is expected on the power costs for these companies. Power and fuel costs contribute approximately 33% of a cement manufacturers’ cost of production. We expect in the worst case an increase of 50% in the coal cost for captive power and 15% increase in the coal cost for the kiln. Thus on a blended basis the cost for cement manufacturers’ could rise by INR190-INR232/ton, impacting estimated EBITDA/tonne by 18%- 29%, without any corresponding price increase. To negate this cost increase cement companies would have to hike prices by INR12-14 per bag, approximately 5%.

With the Jan-Mar quarter being the peak quarter for construction activity and cement demand, cement manufacturers’ should be able to take a price hike, in our view, though it may not be the entire quantum required. We would expect prices to be hiked by about INR5-7 per bag in the current quarter and the companies to take a hit of about INR85- 100/tonne on profitability in 4QFY12F. The rest of the price hike should flow through in 1QFY13F.

Within our coverage Shree Cements uses mainly petcoke as fuel and hence it should see only minimal impact. Shree Cement could even benefit from the price hike likely to be taken by the industry. We believe the greatest impact will be on ACC. The table below shows the impact on the cost/ton and EBITDA/ton for the companies under our coverage.

To read the full report:INDIA CEMENT