Oil prices hitting packaging prices for Indian cement producers

High crude oil prices are forcing packaging costs to rise for cement producers. Data sourced from Capitaline shows that Ambuja Cements’ packaging material cost rose by 19% year-on-year in the 2018 financial year, according to the media. Similarly, Shree Cement’s packaging costs rose by 9%. Both companies use high-density polyethylene bags, which are affected by the cost of oil. Crude oil prices have risen by around 24% to far in 2018 to above US$80/barrel. Cement is packed in bags which are either made of high-density polyethylene or laminated woven paper. As per some analysts, many cement companies opt for the latter and although these bags are sourced locally, crude oil price movements do impact prices of polyethylene bags. So far this year, crude oil prices have jumped about 24% and are currently at about $82 per barrel. Historically, it has been observed that packing material cost per tonne has a fairly high correlation with crude oil prices. As the chart alongside shows, UltraTech Cement Ltd’s packing cost has risen in tandem with crude oil prices.A recent market assessment by Kotak Institutional Equities shows that average cement prices at the all-India level corrected by ?3 per bag so far in September. One cement bag weighs 50kg.