by Sehul Bhatt, Director-Research, CRISIL Market Intelligence and Analytics
For cement makers, profitability likely dipped in the first half of this fiscal as sales price fell and demand growths lowed even as cost pressure eased.
Cut to the second half, and margins are expected to recover sequentially, driven by better pricing power and volume amid continuing moderation in input cost.
The industry’s average operating margin is estimated to have sequentially contracted120 to 170 basis points (bps) in the first quarter on the back of weak prices and lower volume growth.
Interestingly, the margin was 19% in the second half of last fiscal, which is around the highest seen in the past 10 quarters.
Sales volume was impacted in the first quarter of this fiscal as construction activity slowed because of the general elections and labour shortage, and heavy rains would subdue demand in the second quarter. As a result, cement prices would be under pressure before the margins recover in the second half.
Between fiscals 2020 and 2023, cement prices clocked a compound annual growth rate of 4%, then slowed to 2% last fiscal despite healthy volume growth of 11% because of excess supply. As much as 43 million tonne (MT) of capacity have already come on stream last fiscal.
Further, increasing consolidation, regional nuances and aggressive volume push to maintain market share have intensified competition.
This fiscal, demand moderation and supply addition will further reduce prices by 1-3%, while volume will improve 7-9% from the high base of fiscal 2024.
Manufacturers are planning to add another 43-46 MT of capacity this fiscal. That will reduce the industry’s utilisation slightly to 70-72% compared with ~72% last fiscal, but still well above the decadal average.
Power and fuel, freight, and raw material account for more than 75% of the operational expenses of cement manufacturers. The cost of power and fuel fell 16-18% last fiscal as international pet coke prices and Australian coal prices slid 37% and 58%, respectively. Freight costs, too, decreased — marginally so, due to lower lead distances and a better transport mix. Meanwhile, the cost of raw material rose because of costlier fly ash and slag, and limestone mining.
The cost of power and fuel is expected to remain favourable for the industry this fiscal as well, declining10-12%, driven by continued softening of pet coke and coal prices. In the first quarter of current fiscal, international pet coke prices dropped ~14%, while Australian coal prices declined ~17% on-year.
As costs account for ~30% of operational expenses, their reduction is key to profitability. Freight expenditure will ease marginally on cheaper diesel and optimisation of lead distances through capacity expansion.
However, raw material costs will rise 6-8% on higher demand for fly ash and slag amid the expanding share of blended cement, and auctioning of limestone mines at premium bids. Hence, despite some aberrations in the first half of fiscal 2025, we believe that the decline in overall operational expenses will likely expand the average operating margin by 100-200 bps to register 18-20% in fiscal 2025.
The pace of key construction projects, impact of monsoon on agricultural profitability, and volatility of crude oil and coal prices amid geopolitical uncertainties will bear watching, as these could significantly sway the profitability and demand outlook for the industry.
As for pricing, the pace of consolidation and market share scenario will remain monitorable.
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