Production Costs Of Cement Units To Increase

The cement industry, hit by declining prices over the last nine months, appears headed for further trouble as the cost of production is set to rise following the 12 per cent hike in freight charges announced in the Railway Budget.

The increase in freight charges, higher than the industrys expectation of around 8 per cent, will result in an increase of Rs 65-70 per tonne in production cost on account onward movement of cement alone, sources in Larsen & Toubro, the countrys second largest cement maker, told Business Standard yesterday.

Grasim vice-president (marketing) R M Cursetji said: It will also have a rippling effect as prices of all major inputs is bound to go up following this steep hike in freight charges.

 

Industry sources said the overall increase in the cost of production will be about Rs 80 per tonne.

The government had, earlier this month, announced deregulation of the coal sector. This will result in an increase in production cost by about Rs 15 per tonne. The industry is desperately looking for sops, like cuts in the import duty, in the Union Budget which is to be presented tomorrow to tide over the situation.

Due to the oversupply in the industry, cement majors are wary of passing on the rise in production cost to their customers. Only certain areas in the southern market are cement-deficit, and prices can probably be increased there, Cursetji said.

Sources in other cement companies ruled out the possibility of increasing prices in the east and north, which have a surplus of cement.

Gujarat Ambuja Cements treasurer Anil Singhvi said: We will probably have to wait till April-May, when the market is expected to improve, to come to a decision.

Even in that case, the increase cannot be more than Rs 4 per 50-kg bag, analysts said. Till that time they will have to absorb the cost increase and this in turn will affect their bottom line in the first half of 1997-97, unless there is a dramatic improvement in the demand situation, they added.

Analysts say L&T can increase prices, albeit marginally, due to the strong brand equity of its product.

Gujarat Ambuja is likely to be the least affected as its freight costs are far lower than the industry average as it has a shipping division to transport its cement.

ACC, the countrys largest cement company, whose profitably ratios in the first half of the current financial year declined dramatically, is unlikely to fare well in the first half of 1997-98, analysts said. Our Delhi Bureau adds:

The Cement Manufacturers Association of India yesterday said preliminary estimates on the 12 per cent railway freight hike suggested that the cost of producing cement would increase by Rs 5 per 50-kg bag.

This includes the total impact on the cost of production due to the freight hike and the transport of gypsum, coal and other raw materials to the cement manufacturing factories through railways.