Tokyo Cement 2Q suffers on price controls amid escalating costs

Tokyo Cement Company (Lanka) PLC saw its revenue falling and profits tumbling in the three months to September, intensifying the trend from the last couple of quarters as multiple issues faced by the company came to a head in the most recent period, prompting the government to abandon the price controls, which caused shortages of cement in the market.  

Sri Lanka’s largest locally owned cement manufacturer and the market leader in ready mix concrete reported revenues of Rs.11.88 billion in the July-September quarter, up just 4.0 percent from the same period last year. 

The company’s net profit in the same period slumped to Rs.127.0 million or 32 cents a share compared to earnings of Rs.2.1 billion or Rs.5.25 a share reported in the corresponding period last year. 

For the six months to September the company’s earnings fell by 85 percent to Rs.423.8 million or Rs.1.06 a share on revenues of Rs.22.5 billion, up 18 percent. 

While the company has been facing issues in relation to the price controls for sometime amid rising costs across its supply chain, the situation came to a head in the forgoing quarter with the weakening rupee, foreign exchange shortage, which caused the delay in opening LCs, shortages and delays in raw material imports, soaring shipping costs and the lockdowns that were re-imposed.

While the fuel price increase and the unavailability of vessels escalated inbound freight rates by over 300 percent within a very short period, the cost of clinker continued to increase in line with coal prices, as demand outstripped supply, the company said. 

As a result, the cost of sales climbed 32 percent from a year ago period to Rs.9.83 billion in the quarter, while distribution expenses surged by an equal percentage to Rs.1.44 billion.  

While the travel restrictions and non-availability of transportation hindered customers from collecting finished goods from factories and warehouses, retailers were hesitant to hold stocks for longer periods due to lockdowns as they were not ready to block their cash flows for longer period for cement which fetch a very low margin compared to other construction related materials. 

These conditions and the drastic cut down or complete suspension of cement imports by certain importers caused a shortage in the market towards the end of the quarter, the company said in a statement.

In response, the government removed the maximum retail price of cement on October 11, after which the industry set the new price of a 50kg bag of cement at Rs.1, 098. 

“Tokyo Cement welcomes the Finance Ministry decision to remove the MRP on cement, which will help mitigate losses incurred by manufacturers in the current economic environment and ensure an uninterrupted supply to the market”, Tokyo Cement said. 

“This will also allow the healthy adjustment of free market mechanics to safeguard thousands of jobs and vast chain of SMEs dependent on the healthy performance and business continuity of the cement manufacturing industry,” it added.

While the company expects the cost of raw materials to further escalate in the short term due to the continuous increase in global coal and oil prices and freight rates, the delays in import of raw materials could ease with the steady expansion of the domestic economy. 

St. Anthony’s Consolidated (Pvt) Ltd had 27.5 percent stake in Tokyo Cement and South Asian Investment (Pvt) Ltd held another 20.1 percent while Ube Singapore Holdings Pte. Ltd, the joint venture partner of the company had 10.0 percent stake by September end.