How Is the Indian Cement Industry’s Supply Chain Tackling Rising Inflation and Input Costs?

India is currently battling high inflation and a severe coal shortage, impacting the cement, aluminium, paper and steel industries. Among these, the cement industry continues to be the hardest hit. There is immense pressure on cement companies and their supply chains due to rising input costs. Although data from Credit Ratings Information Services of India Limited (CRISIL) shows that cement prices have risen by 9% from the start of 2021 to March 2022, the price hikes will not fully offset a significant rise in input costs.

Tackling inflation

The cement industry had an interesting start to the financial year (FY) 2022-23 with significant mergers and acquisitions by leading industry giants, surging stock prices and record production statistics. In the current fiscal year, the industry is expecting an 18%-20% volume-driven growth, exceeding the pre-COVID levels by 6%. However, according to the Investment Information and Credit Rating Agency (ICRA), operating margins had declined by 440-480 basis points to around 19.8%-20.2% in FY 2022 amid rising inflation and high input costs.

ICRA also sheds light on the factors hindering the cement industry’s growth. According to its findings, the industry faces skyrocketing prices of raw materials, power and fuel, and freight, which are higher by 12%, 31% and 5% year-over-year (YoY), respectively. Coal and pet coke are the primary fuels used for manufacturing cement in India. Annually, the cement industry consumes close to 10 million tonnes of coal. In a nutshell, the industry supply chains are facing the heat of inflation as they are compelled to buy coal at exorbitant prices and source power from the grids.

The financial impact

A few Indian cement companies (India Cements, Shree Cements, The Ramco Cements amongst others) suffered considerable losses in the quarter ending December 2021. The surge in raw material costs doesn’t seem likely to subside anytime soon. The Consumer Price Index (CPI) inflation is expected to touch 6.7% on average this fiscal year, up from 5.7% in the last year.

Power, fuel and freight costs account for about 55%-60% of the industry’s total operating expenses. Energy prices are expected to rise more than 50% in 2022 before easing in 2023-24, adding fuel to the fire. 

Seasonal setbacks such as early-onset or extended monsoons primarily in Southern India, the ban on construction activities in the Delhi-NCR region and subdued demand are other headwinds the cement industry is currently facing. Cement prices fell ₹5-10 per bag across India in May this year due to a fall in demand ahead of the monsoon season. However, major cement companies announced an increase in prices by ₹15-20 per 50-kg bag in June to pass on the rising cost to the end consumers.

These factors are leading to a slowdown in manufacturing, impacting cement industry suppliers and enterprises. It will lead to the buildup of inventory with fewer orders, impacting the upstream suppliers. They will have delayed orders, which will have an impact on packaging, materials not moving on time, cash and working capital getting stuck, and transportation getting hindered.

With the onset of the monsoon season, the demand for cement seasonally comes down, creating a cash crunch for suppliers. The cement enterprises buying from these suppliers might face pressure on prices and margins due to a slowdown in construction activity. Without optimum selling, timely furnishing of accounts payable (AP) becomes a cause of worry. Due to this, enterprises have to stretch their credit terms unwillingly, and suppliers may experience payment delays beyond fixed credit terms.

With rising input costs and low cash flow, suppliers are constrained on working capital. The impact on small suppliers could be even more as they face roadblocks in receiving on-time payments from their customers. In such a scenario, suppliers could be forced to liquidate savings or resort to unorganized sources of cash and high interest-bearing loans to meet their working cycle requirements.

Paving the way for financial resilience

Experts at C2FO who have been analysing its vast supply chain network have found that the cement industry supply chain needs a stable liquidity flow to transform, reform and perform. This would require substantial liquidity access to mitigate long-term demand-supply challenges and unprecedented roadblocks. In such a scenario, innovative working capital solutions from C2FO’s Early Payment Program can be a boon.

C2FO’s easy-to-use platform offers the control and flexibility for cement industry suppliers to have sufficient cash flow through early payments. On-time capital accessibility for suppliers can lead to better overall relationships and increased trust within the supply chain, supporting the suppliers to make smart and proactive choices regarding the financial requirements of their businesses.

Analysing the data from quarter 3 (Q3) calendar year (CY) 2021 to quarter 2 (Q2) CY 2022, experts at C2FO observed the cement industry supplier behaviour, both from frequency of participation and value terms. The observations showed about 50% growth in the average early payment per supplier (Figure 1) and about a 30% increase in weighted average participation frequency (Figure 2) from the industry suppliers registered on the C2FO platform. 

This highlights that after the second wave of the pandemic, coupled with global supply chain constraints and the rising inflation, an increase in early payment demand can be seen, since suppliers started participating more frequently, enhancing their cash flow requirements from C2FO.

The accelerated cash flow generated through platforms like C2FO will help expedite the cash conversion cycle and reduce the pending payments. The C2FO platform allows businesses to select invoices for early payment, determine the rates and get working capital when they need it the most. This can prepare the cement industry supply chain to tackle rising input costs and  inflationary pressures.

To learn more, please get in touch with a C2FO supplier relationship manager at +91 7035 7035 93 or drop an email at [email protected].