Material costs have been spiralling with no relief in sight

01 May 2022 Long Read

Sectors across all industries have been reeling under the relentless rise in prices. Cement prices have surged by 25 per cent from April 2020, bitumen 87 per cent, MS plates 115 per cent and tor steel by 78 per cent. This rise has been attributed to the ongoing Ukraine-Russia war which has caused a severe economic shock to global economies and adversely affected the availability of steel and other commodities.

Why have prices risen?
“We are not inflating prices to improve our margins,” says Akshat Saraf, Director, Radha Smelters. “It is purely a response to market conditions.” While geopolitical turbulence is one aspect, other factors have pushed up steel prices, including China’s upgraded environmental policies that no longer allow their mills to function owing to environmental damage, shortage of coal and the resulting price volatility, and dependency on iron ore exports.

“While the situation of cement is the same as steel, the problem is that the price increase is not getting absorbed in the market,” explains K Gautam, Joint Managing Director, NCL Industries. “The rise of cement prices also funnels down to coal, transportation and power. Although other raw material costs such as limestone have increased too, transporting these does not have a huge impact as most mines are usually adjacent to the cement plant.”

Coal costs first inched up in October 2021, shooting up drastically after December 2021. The cement industry largely relies on imported coal, pet coke and other alternative fuels because domestic coal is of inconsistent quality. A lack of stable supply of alternative fuels could also help save costs, which India presently lacks – the Indian cement industry uses only 30-35 per cent while other leading countries use 80-85 per cent.

Disruptions like the flooding of mines because of rains and the diverging of coal to the power sector recently have also led to hiked demand and, hence, a hike in prices. The current international coal index doesn’t seem to be declining any sooner either. “The way out would be to bolster domestic coal production or increase the supply for alternative fuels,” adds Gautam.

Solutions or reactions?
To give passage for the increased load on coal supply, passenger trains have been cancelled. Affordable housing and the real-estate industry stand to be impacted owing to the domino effect of increased raw material prices on the price of labour and the final offering. As interventions, the Government has offered duty reliefs to the steel industry and relief for the housing sector as well.

However, these interventions are not stable. “While power is important, other sectors need to be running as well,” reasons Vijay Agarwal, Executive Director, Equirus Capital. “The Government diverted trains from other industries to transport coal to power plants, which is a knee-jerk reaction. Instead, the allocation could have been increased by 10-20 per cent rather than removing stakes completely.” India imports 20 million tonne of coal while having one of the largest coal reserves in the world itself, which still remain untapped.

Is stopping construction and material procurement activities really a solution or is the industry destined to be stuck in this cycle of crisis and short-team reactions?
To pause or not to pause?

Infrastructure projects are timebound and have strict guidelines. “With that mindset, even though builders have stopped procuring raw materials because of the price jumps, infra has not stopped,” Saraf observes. National Highway programmes have been proceeding in full swing, for example. “The industry is at a point where even if one delays execution, prices are going up anyway. So, project completion is a logical priority.”

Initiatives like stamp duty reduction have helped boost interest rates, which has helped the housing sector. The construction industry also needs such an intervention. Seeing the nature of demand-driven commodities like steel and cement, combined with the cyclical nature of the cement industry, most suppliers budget for price volatility into their costs. “However, this year we are seeing some historic prices,” says Rajarama Rao, Vice President, NCC. “We didn’t see this surge coming and nor did our commodities experts. With raw material and fuel prices going up, margins need to come down. For small players involved in government projects, these price surges usually go uncompensated for the most part. As a result, while big players may survive on the back of private projects, smaller companies with lesser project variety are in danger of getting washed out.”

While the real-estate sector might sail through with a few bumps, other sectors like infrastructure, construction and EPC are in a tight squeeze.

Is there a way out?
To fight this situation, there is a need for innovative tactics. As Gautam suggests, one way to reduce production costs is to look at reducing fuel costs or consider alternate modes of transportation. The Railways, for example, can act as a significant cost-curber, he believes. Containerising cement instead of transporting it loosely can help achieve cost-effectiveness for transportation for distances larger than 400 km. “Industrial consumers pay a higher price for diesel than domestic consumers, which was earlier the opposite. But the Railways have innovative ways to tackle that. Konkan Railways has hop-on-hop-off infrastructure that allows a truck to get on and off the wagon.” This eliminates the need for secondary freight and could be a solution for other landlocked industries in other parts of the country as well.

Another way is to turn to technology. It is possible to re-evaluate designs and look for opportunities to cut costs. “Initially, TMT bars were released in Fe415 grade, followed by Fe500 and are now available in Fe550,” says Saraf. “When you go from Fe500 to Fe550, for an amount of load-bearing capacity, the quantity of steel used decreases, easily saving 6 per cent. However, the problem is that all infrastructure is designed as per Fe415 grade.” The norm is to plan for one grade lower – or, in other words, to factor in the usage of inferior products. Similarly, in cement, M100, which can reduce structural weight significantly, is a common grade abroad but not in India. This is used to ensure safety.

India’s codes demand a safety factor of four or five while other countries have a lower factor of safety, with Japan’s as low as one. “We are over-designing our structures four to five times,” Gautam points out. Additionally, he emphasises that it is not a question of relaxing the codes but understanding the requirement. “Our soil quality is good, so we don’t need high-strength concrete or cement in construction.” As the codes do not allow usage for these higher grades of material, instead only specifying a certain range, the industry is missing out on a 15 per cent savings on the price of cement, in Gautam’s view. It is possible to reduce 30-35 per cent of material wastage as well, adds Agarwal.

Further, it isn’t as if our country is not employing innovation. The drawback is that any innovation is slow to get replicated. Another aspect is the use of outdated design technology that refuses to accept new innovations and, in turn, does not mark it fit for approval.

To get ahead of the cost curve, innovating with what we have, relooking at old practices and updating our technology constitute the way forward.

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