Cement companies are staring at a substantial increase in production cost, as oil companies have raised the diesel price by Rs 10 a litre for institutional buyers. Most companies are already struggling to pass on the steep rise in freight and raw material costs due to depressed demand.
Faced with a Rs 96,000-crore oil subsidy bill, the Union Government recently decontrolled diesel prices and allowed oil-marketing companies to raise retail prices in small instalments.
Freight costs rise too
“Oil companies have already decontrolled diesel prices for us. Given the fact that we produce about 10 lakh tonnes a month, the increase in production cost due to this price hike would be about Rs 50 lakh a month and Rs 5 a tonne,” said Shree Cement Managing Director H.M. Bangur. With power supply tight in most southern States, cement companies there are more dependent on diesel. Besides, the recent hike in freight rates by the railways has also pushed up cost of transporting raw material.
Transporting cement, clinker and raw material by road will also turn costlier. A hike of Re 1 a litre on diesel will push freight cost on road by Rs 700-1,000. For instance, a round trip on the Delhi-Mumbai route will go up to Rs 54,700 from Rs 54,000. JK Lakshmi Cement Director Shailendra Choksi said the impact of diesel price hike will be multi-pronged and may vary for companies depending on their dependence on this industrial fuel.
“It will definitely put additional pressure on the industry, which is already facing the challenge of excess production capacity build-up,” he added.
While the industry is ready to face the challenge of diesel-price decontrol, the Government should also allow duty-free import of diesel so that two or three like-minded companies using diesel can come together and start importing, said a cement company official. Despite weak demand, cement companies managed to hike prices by Rs 5-30 a bag across regions in January. The hike in cement price comes after a cut by a similar amount implemented in December due to weak demand. Apart from slowdown in infrastructure projects, labour shortage for construction during festival season had impacted cement demand in the December quarter.