Cement prices won't rise despite freight rate hike

Upcoming monsoon leaves no room for price rise despite 6.5% rise in rail freight

India’s cement industry, which transports nearly 40 per cent of its produce through rail, is unlikely to raise cement prices, despite a 6.5 per cent increase in railway freight rates.

According to cement company representatives, poor monsoon might not let them increase prices, as demand scenario remains poor. But they did not rule out the possibility of pushing the higher costs to customers in four-six months.

H M Bangur, chairman and managing director of Shree Cement, told Business Standard, “There could be an impact of Rs 8-10 for a 50-kg cement bag. However, there cant be a sudden increase in prices We might push the prices up in the next six months. Till then, we have no option but to take a hit on our margins.”

Some of the industry’s executives were not surprised with the move. Rather, they termed the decision a positive one from the long-term perspective. “This will allow railways to improve the  balance sheet and add wagons. There have been a dearth of wagons and we had to divert major proportion of our produce through expensive road route,” said a source.

In terms of cost, for every km of transport through railway a tonne of cement gets dearer by Rs 1.25, while in case of roads the cost comes to  around Rs 2 per tonne a km in a 500-km radius from production point.

However, sector experts disagree with cement makers when it comes to the quantum of an expected rise in cement prices. According to them, with the latest hike in freight rates, the cost of production should be not more than Rs 3 a bag.

As of now, the average production cost (including freight but excluding taxes) comes around Rs 4,000 a tonne. Freight costs make up around 25-30 per cent of the production cost — Rs 1,000 a tonne.

Out of this Rs 1,000 as freight costs, Rs 400-450 is the railway freight proportion. With a 6.5 per cent railway freight hike, it would go up to Rs 480 — a rise of Rs 30 per tonne. “If we take coal into consideration which is transported through rail, the additional cost will be Rs 10 per tonne making the overall increase to Rs 40 a tonne for cement makers - resulting into an increase of Rs 2 per bag of cement (before taxes) and Rs 3 post taxes,” explained an expert on cement.

He added that cement makers can't take the risk of increasing prices as monsoon is approaching. During monsoons, cement prices tend to trade lower. Already, in the last one month, national average cement price has jumped from Rs 280 to Rs 290 a bag.