The rising fuel prices in the wake of Russia-Ukraine tensions will hurt Indian cement makers, which are already reeling under rising costs of raw material and energy. The price of Brent crude jumped 3.08% a barrel to $98.3 on Tuesday evening, while West Texas Intermediate (WTI) increased by 4.2% to $94.9. The power and fuel costs of major players -- Ultratech, Ambuja and ACC -- have jumped by 39%, 58% and 26% in the December quarter. Fuel prices will also affect logistics costs of companies, which are struggling with lower demand.

Energy and logistics costs together are around 60% of the overall costs of cement makers. Raw material costs add up to around 13-15%. Energy cost of Ultratech, which is the largest cement manufacturer with 114.55 million tonne per annum (MTPA) production capacity, shot up 39% year-on-year to ₹1,327 a tonne in December quarter. Logistics costs increased 4% annually to ₹1,229 a tonne. Raw material costs -- flyash and gypsum -- increased 7% year-on-year (YoY) to ₹538 a tonne. Sales volume slipped slightly by 3% to 23.13 million tonne (MT).

For Ambuja, which has 31.45 MTPA capacity, the freight and forwarding cost has come down by 4.5% to ₹1,178 a tonne in the December quarter, however, fuel cost increased 58% to ₹1,572 a tonne. Raw material costs were up 7.9% to ₹408 a tonne. The sales volume of cement and clinker has increased marginally to 7.2MT from 7MT. Ambuja's subsidiary ACC has witnessed its power and fuel costs rise by 26% to ₹1,165 a tonne in October-December. It has reduced the freight and forwarding cost by 1% to ₹1,234 a tonne. Raw material costs increased 13% to ₹490 a tonne. However, cement sales volume increased by just 1% to 6.57MT.

"Factoring in current energy cost and cement price trends, we are cutting 2022 EBITDA (earnings before interest, tax, depreciation and amortisation) estimates (of Ambuja) by 14%," Edelweiss says in its report. In all probability, the margins in December quarter have bottomed out and should see steady recovery ahead, it says.

Ambuja plans to enhance its capacity to 50 million tonne (MTPA). With the current ₹3,500 crore investment for adding 7MTPA capacity in East India and completion of its ongoing 1.5 MTPA grinding unit in Punjab, Ambuja is expected to achieve 40 MTPA by mid-2024. It has a strong balance sheet with cash of ₹4,000 crore.

Jeffries said in its recent report that Ambuja management remains optimistic about improving macro and government capital expenditure. The long-term demand for the cement industry is on a strong footing driven by increasing population and urbanisation, it added. Key cost items like coal will continue to increase in the international markets, while diesel price will be ballooned with Russia-Ukraine tension. In India, the prices of fuel are expected to move up post assembly elections.

ACC's December quarter EBITDA of ₹5,600 crore is down 21% due to higher costs. The total costs per tonne rose 6% QoQ and 8% YoY, thanks to a sharp increase in fuel prices, said ICICI Securities in its report. However, ACC's capacity expansion is on track. The 2.7MTPA clinker unit at Ametha, Madhya Pradesh, along with 1MTPA grinding unit may get commissioned by December 2022. The 1.6 MTPA grinding facility at Tikaria is likely to commission by June, said analysts with ICICI Securities. Balance 2.2 MTPA at the Salai Banwa, Uttar Pradesh, grinding unit may go on stream by early 2024.

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