Consolidation is the name of the game in India’s cement sector, but another emerging trend is the growing thrust on green energy. Cement companies are making significant investments in waste heat recovery systems (WHRS) and other renewable energy sources such as solar and wind power. This is expected to reduce the sector’s reliance on expensive thermal power plants or state grids for electricity and result in lower power costs.
Captive thermal power and grid electricity costs stand at ₹5.5 to ₹8 per kilowatt-hour (kWh), while WHRS power costs ₹1 per kWh and solar power costs (under a power purchase agreement) ₹4 to ₹4.5 per kWh, according to Motilal Oswal Financial Services. The brokerage house estimates the share of green energy in the sector’s total power consumption will rise from 35% in FY24 to 50% by FY27.
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Power and fuel costs are estimated to comprise about 35-40% of the sector’s total production cost. Some companies have made significant progress on this front. For instance, at Shree Cement Ltd and JK Cement Ltd, green power accounted for more than 50% of total power consumption in FY24. Larger peers including UltraTech Cement Ltd, ACC Ltd and Ambuja Cements Ltd are also moving in this direction and have committed to adding more green power capacity.
Another benefit of using alternative fuels is that it will help the sector lower its carbon footprint. Cement manufacturing requires extensive use of coal and petroleum coke during clinker production, which releases harmful greenhouse gases.
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Slow but steady
Cement manufacturers’ green efforts are slowly changing this for the better. An analysis by Kotak Institutional Equities showed the greenhouse gas emission intensity of certain large cement companies has fallen in recent years (2017-2023). In 2023, Dalmia Bharat Ltd recorded the lowest intensity while UltraTech recorded the highest, said the Kotak report. But meaningful de-carbonisation will be a gradual process owing to challenges such as the long gestation period of some WHRS projects and regulatory approvals. Also, some of these initiatives can be capital-intensive.
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Nonetheless, these gradual cost savings are welcome, especially as cement companies continue to struggle with muted prices amid stiff competition. A recovery in cement prices is unlikely in the first half of FY25, which means the sector’s FY25 earnings estimates are vulnerable to downgrades. The saving grace is the softening cost of coal and petroleum coke, which is expected to provide a near-term cushion to margins.
