Higher mineral tax likely to pose a challenge to cement sector recovery

A Supreme Court (SC) judgment in July 2024 is now impacting the cement industry. The SC ruled that state governments have the authority to levy taxes on mineral rights and mineral-bearing lands, in addition to collecting royalties.

 

Following this, the Tamil Nadu (TN) government introduced the Tamil Nadu Mineral Bearing Land Tax Act, 2024. Under this Act, the state has imposed a levy of ₹160 per tonne on limestone with effect from February 20. This will impact cement companies that source limestone from TN, and if other states follow up with similar Acts, it could raise the costs for the cement industry.

 

Limestone is a key raw material for cement. It amounts to about 65 per cent of the total raw material cost. At present 20–22 per cent of total operating cost is raw material cost, while total operating cost is 80-85 per cent of sales. 

 

India Cements (now controlled by Ultratech), Ramco Cements, and Dalmia Bharat have 90 per cent, 51 per cent and 38 per cent of their respective cement capacity in TN.

 

Ramco has around 52 per cent of the total clinker capacity in the state, while Dalmia has 23 per cent, with Ultratech Cement having around 4 per cent of total clinker capacity (due to India Cements) while ACC (controlled by Adani) also has around 2 per cent of total clinker capacity in the state.

 

The levy will raise operating costs by up to ₹213 per tonne.

 

It is likely to impact the operating profit by an aggregate of close to 10 per cent of the total operating profit for Ramco Cements and 3 per cent for Dalmia Bharat, over the next two financial years. 

 

Players with major exposure in TN will have to hike cement prices by at least ₹8/bag to compensate. Ramco has a high debt: equity ratio of around 3.3 times as of 9MFY25 and the new tax will thwart its attempts to deleverage.

 

Other cement companies may try to pre-emptively hike prices to offset the impact of similar levies by other states. The Karnataka (Mineral Rights and Mineral Bearing Land) Tax Bill 2024 is pending the Governor’s assent and the Jharkhand Mineral Bearing Land Cess Bill 2024 is also on the table.

 

The cement industry has taken several hikes in the past, some of which have proved unsustainable, given over-supply in the industry and weak demand. The southern market has been particularly weak in the recent past with prices lower than the other regions.

 

Ramco has a clinker capacity of 8.2 million tonnes (MT), while Dalmia Bharat has a clinker capacity of 5MT in TN which is about 21 per cent of its total capacity. The above estimates are on the assumption of 100 per cent utilisation of TN clinker capacity and limestone requirements of 1.4 times for every tonne of clinker. Chettinad Cement (unlisted) also has over 50 per cent of clinker capacity in TN.

 

This will add to the pressure on the cement industry at a time when it is pulling out from a trough caused by heavy rainfall and slow government capex in FY25.