Energy price falls may increase 2H12 margins

Energy price falls may increase 2H12 margins
Published: 04 May 2012

Tagged Under: Pricing Energy 

Industry analysts predict a recovery in cement margins in 2H12 as a consequence of falling international energy prices and the continued strength in cement prices, as highlighted in last week’s newsletter.

The squeeze on cement markers' profit margins was widely felt during 2011, driven in the main by rapidly-rising energy costs that impacted on companies' bottom lines. Key energy prices rose by over 40% in a six-month period during 2011. This week's 1Q12 financial reports show how much inflationary energy costs have been putting pressure on cement firms’ margins. HeidelbergCement, for example, reported a 77% decline in operating profit in 1Q12 thanks mainly to higher-than-expected energy costs.

"In view of the higher costs of energy and raw materials we launched price increases and in some markets we were already able to execute them in order to improve our operating margins," said Bernd Scheifele, HeidelbergCement's CEO.

Passing on the rise in input costs has not been easy for some cement producers. Consequently, most of the global cement companies factored in higher energy cost inflation at the start of the year (HeidelbergCement +5%, Holcim +6% and Lafarge +7%) but there has been a drop in the cost of coal and petcoke by -14 and -39%, respectively.

Only oil prices have remained high in the 1Q12, continuing to rise +8% versus 2011 pricing. While global production of oil has been generally in decline, stimulating higher prices for the sector, OPEC has recently raised output, causing oil to fall back under US$118/barrel.

Cemex now expects the cost of energy on a 1t of cement produced-basis to fall by 2% in 2H12. The company also sees consolidated volumes for cement likely to grow by around 2% during 2012, giving space for higher profit margins as long as current cement prices are maintained. Cemex recorded that shipments were up 2.3% in 1Q12.

Volumes will be critical going forward if cement producers are to claw back some gains in the 2H12, but it is the changing climate of energy costs that offers most reason for optimism in the near term. The reversal to the energy squeeze on margins seen in 2011 does seem increasingly likely, but the exact timing of the recovery is still open to debate. Industry analysts suggest that some benefits from energy price falls could be seen regionally in 1Q12, but particularly in 2Q and 3Q. As energy costs ease, the amount of return that producers might expect is likely to be limited by increasing pressure to reduce cement prices.

One area of the world that is fighting against the tide with renewed energy price-hikes is Taiwan. The Taiwanese government had been considering staggering electricity price rises of some 35% until protests caused a rethink. Even so, industrial users like Taiwan Cement, Asia Cement and Chia Hsin Cement, will still be stung by a 14% electricity price rise from June.