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Cement: Tackling the ‘power’ful devil! - Views on News from Equitymaster
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Cement: Tackling the ‘power’ful devil!
Nov 24, 2006

Traditionally, majority of cement players have relied on state electricity boards (SEBs) for supply of power. The main considerations in the case of power input are power tariffs and the reliability of supply. Grid power results into low efficiencies predominantly due to high transmission and distribution losses as well as its expensiveness as compared to captive power. Cement is a power intensive industry. Nearly 110 units to 120 units of power is required to produce one tonne of cement. Most of the new plants using the dry process have been able to improve the energy efficiency and enjoy a competitive edge over wet / semi-dry process based plants. As mentioned dry process is energy efficient and thus reduces total power costs. Companies are transforming cement-manufacturing processes from wet to dry and setting up captive power plants, in order to improve margins.

Let us analyse the power costs of cement majors and their impact on margins.

From the table below, we get an idea that ACC has been able to reduce its power costs substantially as compared to its competitors Gujarat Ambuja (GACL) and Madras Cements

Power cost
Parameter Unit FY04 FY05 FY06 CAGR of past 3 years (%)
ACC Rs per tonne 516 506 515* -1%
Gujarat Ambuja** Rs per tonne 519 531 585 4%
Madras Cements Rs per tonne 479 559 540 6%
* 9m ended CY05
**Gujarat Ambuja has changed its accounting year from financial to calendar year. The data mentioned in the above table pertains to FY03, FY04 and FY05

If we take a look at power cost per tonne produced and capacity utilization, we get an idea that power costs per tonne reduces with increase in utilization levels as benefits of economies of scale kick in.

In case of ACC, transforming its plants to dry process of cement manufacturing along with high utilization levels (increased from 90.7% in FY04 to 91.2% FY05), have reduced power costs on per tonne basis from Rs 516 in FY04 to Rs 506 in FY05. The same stood at Rs 515 for CY05 (nine month period). Transforming manufacturing of cement from wet to dry process and resorting to captive power helped company reduce power consumption from 89Kwh/T to 85Kwh/T. In case of Gujarat Ambuja and Madras Cements, power costs on per tonne basis have been increasing.

Gujarat Ambuja operated at low level on account of severe monsoons during the past two years, resulting into operational stoppages due to shut downs. GACL’s plants in Punjab run on power supplied by SEB and currently the captive power plants use furnace oil whose prices are spiraling. The company has planned to install captive power plants based on multiple fuels like coal, lignite or agro waste to reduce costs and negate the effect of increase in costs of a particular fuel. This move will not only help company reduce power cost, be self sufficient in terms of power but will also reduce dependence on a particular fuel. Thus, reduction in costs will further improve EBITDA margins in future.

Though, Madras cements was the first company in South India to convert all its capacity to the dry process, its power cost per tonne basis have been increasing on account of increase in furnace oil prices, making captive generator sets usage uneconomical. The company uses power generated by captive power plants and windmills. The power cost per tonne basis has increased from Rs 479 in FY04 to Rs 559 in FY05. This is on account of low wind power generated due to low wind velocity and rising furnace oil prices. In FY06 the power cost have come down to Rs 540 on account of increased use of captive power plants and higher utilization levels (capacity utilization increased from 62% in FY04 to 78% in FY06). To reduce power costs, company is increasingly resorting to use of wind power. But, even in case of windmills, risk of low wind velocity remains, which ultimately forces company to move to other source of energy.

Cement being a commodity, with economies of scale costs comes down. Cement majors, are transforming their production process to dry process but they also need to go in for cheaper captive power that will ensure smooth functioning of plants. This will result in cost reduction, which will result in margin improvement. Again, commodities have their own cycles, during an upturn every one gains. But from a long-term perspective or considering ups and downs of a typical commodity cycle, cost effective producers survive. Currently, cement is in the midst of a significant boom. We expect cement prices to remain firm in the medium term given the strong housing and infrastructure led demand and lack of sizeable capacity additions. Thus, while currently, irrespective of the power costs, the companies are busy raking up gains, having operations which consume power in the most economical way will separate the men from the boys in the future.

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