Impact of rising crude oil prices on packaging cost of cement producers

8-Oct-2018

Cement companies are battling cost increases on multiple fronts. Prices of petroleum coke—a key raw material—remain elevated. Since most of its requirement is met through imports, a weakening rupee is adding to the pain.

Global oil prices are inching up, translating into increased diesel prices and elevated transportation costs for the industry. A spike in crude oil prices has also a bearing on the sector’s packaging cost.

Cement is packed in bags which are either made of high-density polyethylene or laminated woven paper. As per some analysts, many cement companies opt for the latter and although these bags are sourced locally, crude oil price movements do impact prices of polyethylene bags.

So far this year, crude oil prices have jumped about 24% and are currently at about $82 per barrel. Historically, it has been observed that packing material cost per tonne has a fairly high correlation with crude oil prices.

Data sourced from Capitaline shows that Ambuja Cements Ltd’s packaging material cost grew 19% to ₹801.22 crore in fiscal year 2018 from ₹672.23 crore in FY17. Similarly, Shree Cement Ltd’s packaging material cost has risen 9% year-on-year in FY18.

Considering the surge in crude oil prices this year, this component of overall operating cost is poised to rise.

“Crude prices are 35% above the FY18 average. We believe the recent uptick is likely to pose as a headwind and lead to increase in packing costs,” IIFL Institutional Equities said in a report. It expects packing costs to increase by about ₹30 per tonne.

Usually, cement companies pass on their cost burden through increase in product prices. However, in the current scenario of subdued demand, price hikes taken during July and August have failed to sustain. This year, prices were also affected by heavy rainfall in a few states and floods in Kerala.

A recent market assessment by Kotak Institutional Equities shows that average cement prices at the all-India level corrected by ₹3 per bag so far in September. One cement bag weighs 50kg.

In short, weak price trends and rising cost pressures indicate that earnings of cement producers are unlikely to revive anytime soon.

Source: LIVEMINT