India: cement firms hit by high coal prices

Input cost pressures for cement manufacturers have lately been rising due to international coal prices gaining 4% MoM in December, 2012 to average US$90.8/t in the first week of December coupled with 0.6% rupee depreciation against the dollar during the same period, says a Shajar Capital research note.
As of 30 November 2012, Richards Bay Coal (FOB) stood at Us$89.8/t while Newcastle stood at US$87.1/t according to an AKD Securities research note.

In this regard, with exports slowing down on the broader scale and the rising share of domestic dispatches, the impact of costlier coal as a result of rupee depreciation escalated. said Yawaruz Zaman, investment analyst at Shajar Capital. In recent weeks, manufacturers have increased prices in the INR5-10 per bag range following the increase in coal prices.

Local cement prices have recorded a healthy increase of 23% during the last year, providing a buffer not only against higher coal prices but also against slower exports and rupee depreciation, said Zaman.
So far, mainstream companies posted a healthy increase in gross margins during the first quarter of fiscal 2013 as a result of better pricing as well as materialisation of cost controlling measures
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While the adverse coal movement will have negligible or even impact on earnings in the second quarter of fiscal 2013, profitability in the next quarter can potentially come in on the lower end of the spectrum should coal costs continue to rise.

Increased demand due to the winter season of coal is believed to be the major reason behind the rising prices. However, going forward upward pressure on prices will be arrested due to demand slowdown globally and production of cheaper alternatives such as shale gas.

Local cement numbers clocked in an encouraging 6.8% growth to 9.5Mt in the five months of fiscal 2013 with November’s sales particularly impressive at 1.96Mt, an increase of 19.6%. While cumulative exports decreased 4.4% to 3.6Mt, November numbers alone surprised with an increase of 11.7% to 0.69Mt on the back of improved Afghan exports – Pakistan’s biggest individual export market.