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Cement: The raw material trail! - Views on News from Equitymaster
 
 
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  • Dec 4, 2006

    Cement: The raw material trail!

    Cement is a product of high volumes and therefore transporting it over large distances can prove to be uneconomical. This makes it imperative for the plants to be located near markets. In some cases the plants also tend to be located near the limestone reserves (a major raw material for cement) from where the cement is transported to nearby states. Cement grade limestone is located only in certain areas in the country leading to establishment of cement plants in clusters.

    There is a trade-off between proximity to markets and proximity to raw materials due to which some cement plants have been set up near big markets despite lack of raw materials. Gujarat Ambuja, one of the efficient cement manufacturers enjoys both the benefits. Its plants are situated in the regions where limestone is available in abundance and it has got strong presence in western region where demand exceeds supply. Thus, such a demand supply mismatch yields better realizations. Raw material cost per tonne is least in case of Gujarat Ambuja as compared to its peers ACC and Madras Cements.

    Raw material cost per tonne
    Company FY04 FY05 FY06 CAGR- FY04 to FY06 (%)
    ACC 542 604 477* -12%
    Gujarat Ambuja** 127 139 120 -6%
    Madras Cements 286 309 324 13%
    *9mths 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

    The cement sector holds immense promise in terms of utilising wastes from other industries: fly ash (from the power sector) and blast furnace slag (from the iron and steel industry) are both used to manufacture blended cement, without sacrificing the quality of cement. The use of these wastes also enables cement companies to increase their profits. GACL uses quite a bit of industrial waste materials and hence is able to cut costs. The limestone raising costs have gone up in recent times due to inflationary pressures on commodities such as diesel, coal etc. This has adversely impacted cost of production in case of ACC and Madras cements, thus impacting margins. Gujarat Ambuja has been able to reduce costs, which could be attributed to usage of less expensive alternatives like agro waste as a substitute for coal.

    Madras cements though being present in a limestone rich region, has not been able to avoid high raw material expenses, since, as mentioned earlier, limestone and gypsum raising costs have gone up. Raw material cost per tonne basis is higher in case of ACC as compared to Madras cements. But raw material cost as a percentage of sales has been neck to neck in case of ACC and Madras Cements on account of better realisations fetched by ACC and its all India presence which gives it better geographical mix and off sets effect of low prices in one region.

    Gujarat cements raw material cost per tonne basis is the least in the industry as it enjoys access to good quality limestone which is crucial, as for 1 tonne of cement almost 1.5 to 1.7 tonnes of limestone is required, depending upon quality. Unlike its peers, the company also uses indigenous coal, which insulates it to some extent from strengthening imported coal prices. Its brand also enjoys premium and mostly sold in bagged market, thus enabling it to enjoy higher realizations. All this has resulted in Gujarat Ambuja enjoying lower raw material costs and consequently better margins. Further, the lower costs for Gujarat Ambuja could also be attributed to the fact that the company capitalizes a fair bit of its investment towards raw material procurement, which leads to the same being reflected in depreciation and amortization rather than a yearly expense. This however, still does not take anything substantial away from the fact that the company remains the industry benchmark in cost effective manufacturing of cement.

     

     

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