Massive exchange losses, sharp cost increases dent Tokyo Cement 4Q performance

Tokyo Cement Group reported its financial performance for the fourth quarter ending 31st March2022, with a turnover of Rs. 16,158 million reflecting a year-on-year growth of 31 percent, compared to Rs. 12,373million during the same period last year.

Despite turnover growth, Tokyo Cement’s sales volumes reduced by 11 percent compared to the fourthquarter last year, due to a plant breakdown at one of the grinding mills and unavailability of raw materials.

The Group recorded a Rs. 2,531 million loss for the fourthquarter,of which the largest contribution came from exchange losses that amounted to Rs. 4,822 million.

The Group’s year-on-year performance comparisonagainst the previous financial year reflects the impact of significant increases in cost of goods and shortages of raw materials due to US$ illiquidity in the market. 

Sales volume of Tokyo Cement showed a marginal increase of 1 percent for the financial year, whilst turnover saw a year-on-year growth of 22 percent, from Rs. 42,962 million to Rs. 52,477 million.The Group recorded a loss of Rs. 453 million for the FY 2021/22, with the exchange loss standing at Rs. 5,050 million for the year.

During the quarter pricesof all construction material spiked sharply, reflecting the highly volatile macroeconomic environment. Raw material costs increased in line with global price surges, compounded upon by increasing freight rates due to rising oil prices, and interest for longer credit periods of 180 days. 

In addition, constraints in establishing Letters of Credit (LCs) gave rise to material shortages. Theprice of 50kgbag of cement was adjusted to reflect these cost increases accordingly,
An important factor to note is that the cement industry imports its raw materials on 180-day Letters of Credit (LC) as per CBSL requirement. Therefore, the material that was received in October 2021, manufactured, and sold at an exchange rate of Rs. 203 incurs a significant exchange loss when settled in April 2022 at the current rate of Rs. 365 to the US$.

This took place in the backdrop of greater percentage increase in prices across all other construction material, including but not limited to steel, electrical cables, and even locally sourced sandthat has no direct forex impact.

During this period the country started to feel the impact of diminishing forex reserves and the inability of importers to establish LCs in the preceding months, with shortages occurring inall sectors.Due to continuous cost increases and currency depreciation, many manufacturers and traders increased the price of goods in frequent intervals throughout the quarter.
Consequently, price increases across all building materials slowed ongoing construction projects and effectively postponed commencement of new projects until price stability is established in the market. The construction industry faced downsizing challenges due to material shortages, payment delays to government contractors, and poor labour turnouts owing to the nationwide breakdown of transportation infrastructure.

Cement importers were unable to run operations in the highly unstable fiscal environment, leading to market shortages and increased demand for cement. In this backdrop, the burden to ensure market stability fell on local manufacturers who were also experiencing similar challenges, in addition to the greaterobligation of sustaining anextensive value chain comprising of thousands of stakeholders, many of whom solely depended on the industry. However, the raw material shortages caused by the forex crunch exerted continuous pressure on the production process, leading to insufficient supply to meet market demand.

The IMF staff level technical agreement, to be finalized in the coming months,is expected to alleviate some of the pressures on the economy and open channels for bilateral loans and grants. However, until such time CBSL envisages further austerity measures to help curb rapid economic downturn. 

However, Tokyo Cement has taken many proactive measures to minimise the impact of possible contractions to the economy on the Group’s performance. Anticipating a challenging environment, the Group has reforecast demand, rescheduled sourcing and production plans, and adjusted cashflows accordingly. 

The Group has deployed drastic cost saving measures, streamlined operations, and postponed capital expenditure.While the short to medium term economic landscape remains uncertain, Tokyo Cement has a proven track record of resilience and resurgence, and is committed to rebuilding the nation, stronger than ever before.