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Lack of rail rakes, higher diesel prices to weigh on cement margins

Avishek Rakshit/Kolkata 14 Mar 18 | 10:57 PM

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Despite the projection of an increase in cement prices over the next few months, the profitability of producers might stay under stress, with diesel prices projected to remain firm and lack of railway rakes to carry the finished product. Also, higher cost.

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According to ratings agency ICRA, diesel prices last month stood at Rs 61.8 a litre in Delhi. In the December quarter, it was about Rs 58 a litre.

"On a sequential basis, it is a three per cent increase, while on a year-on-year basis, the increase is seven per cent. Looking at the current trend, diesel prices will continue to remain firm, which might affect profitability," said Sabyasachi Majumdar, senior vice-president at ICRA.

However, analysts think cement prices are also expected to rise, relieving the stress at companies. "Last year's base, on account of demonetisation, is low. In a year-on-year comparison, prices are expected to firm up more," a sector expert said.

In the December quarter, on a sequential basis, UltraTech Cement posted a 21.1 per cent increase in transport and forwarding expenses to Rs 18.9 billion. ACC posted a 17.4 per cent increase under this cost overhead, at Rs 9.4 bn. Birla Corporation's was 19 per cent higher.

"While diesel prices had remained strong, availability of railway rakes for transportation pulled up costs significantly," said a Birla official. Industry officials unequivocally blame shortage of railway rakes, on account of Coal India diverting these to supply power plants.

"This disrupted not only supply of coal for clinkerisation plants but also transportation of clinker to the grinding units and cement to rail-fed destinations, especially in the central zone markets," said the official quoted earlier.


Data from the Cement Manufacturers' Association showe the industry transported 9.39 million tonnes (mt) of cement and clinker in June last year, a 15.6 per cent increase in rake loading. This dipped to 7.9 mt in August. Although volumes loaded in railway rakes improved marginally in September to almost 8.1 mt, this was still lower on a year-on-year basis. In December, the railways transported 49.6 mt of coal but only 9.6 mt of cement.

A Coal India official reasoned that the company has a mandate to route 75 per cent of its output to power plants for securing the country's energy needs. Given the availability of rakes, it had to prioritise between segments. Currently, the monolith uses 250-260 rakes a day for transporting to power plants and its priority is to raise this to 288 rakes a day. So, cement sector experts believe the rake shortage will continue.

"As railway rakes became scanty, road transport had to be used and with diesel prices already on the higher side, transportation costs increased significantly,, a sector official said.

According to UltraTech, apart from these factors, the Railway Busy Season Surcharge also impacted its logistics cost by five per cent, pulling it up to Rs 1,127 a tonne. Transport and forwarding expenses comprise 20-30 per cent of total cost.

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