Cement may firm up on new coal pricing

Additional cost pressure due to costlier raw material from Coal India; companies expect prices to rise by Rs 8-10 a bag.

The cement industry, which witnessed a round of price cuts last month, is now facing additional cost pressure from Coal India’s new pricing mechanism. CIL shifted to a pricing based on gross calorific value (GCV), in line with global norms, from its earlier grading on useful heat value. The result has been a rise in prices.

Cement companies are expecting the increase in fuel cost to be around Rs 8-10 a bag (50 kg), though analysts say it should be around Rs 3-4 a bag.

H M Bangur, managing director, Shree Cement, said, “Things will be clear next week, when the new bills come from Coal India. We expect a rise of Rs 8-10 a bag. We will then determine how much we need to pass on.”

The sector consumes about seven to eight million tonnes of coal annually. “Normally, the sector uses higher grades of coal, like C and D. With the GCV regime in place, our average price rise is 10-15 per cent. For the cement sector, I think the impact may be a bit higher,” said H K Vaidya, chief general manager, sales and marketing, CIL.

A senior official of the Cement Stockists and Dealers Association in Mumbai said, “Manufacturers have not communicated any rise in prices, but we are expecting these to rise from January 15. The impact of the change in pricing method (of CIL) would differ for companies, but as much we have gathered, it will be a substantial increase in cost prices.”

Shailendra Chouksey, whole-time director, JK Lakshmi Cement, said: “The impact on pricing would be anywhere between Rs 8 and Rs 10 a bag. One will pay much higher; in fact, it will double our expense, as the pricing would increase by 20-30 per cent and in some cases by 50 per cent.”

An analyst from a domestic brokerage said, “Of the bigger companies, ACC has the highest dependence on linkages, at around 60-70 per cent. Jaypee Cement also meets its major requirement from them. UltraTech and Ambuja Cement’s dependence on CIL is 30-35 per cent. Though Singareni Coal has not yet announced the change in pricing method, we expect it to follow soon. Southern players are dependent on Singareni Coal.”

In the new regime, there will be 17 slabs of prices. The slabs are divided on the basis of a bandwidth of 300 kcal per kg. While the power sector will not enjoy discounts for the first five, these will be available for the remaining bandwidths.

However, the discount rate is also going to come down in the new mechanism. CIL officials says it was 20-77 per cent in the UHV regime.