Must-know: The cost elements of cement

Cost elements

The major cost elements that are associated with the production of cement include:

1. Power and fuel costs
2. Raw material costs
3. Selling expenses
4. Other expenses

Power and fuel

The cement industry relies on power. Power and fuel costs account for ~30% of the price of cement when it’s sold. As a result, power and fuel have a major impact on the company’s operating expenditure. Coal is used to fire the kiln. Different varieties of fuel—diesel, coal, pet coke, and lignite—are used to grind the clinker in the kiln. Cement plants require different amounts of power based on the heat treatment process that’s being used. Energy consumption hovers around 60–70 kilowatt hours (or kWh) of power per pound of clinker produced.

Limestone and other raw material

The second major component in the production of cement is the cost of raw materials. The primary raw material that’s used is limestone. Raw materials account for 30%–40% of the cost of sales. Cement plants are generally located near limestone quarries because limestone can’t be transported long distances. As a result, clinker plants are clustered around limestone deposits. Apart from limestone, other raw materials used in the cement industry are fly ash, slag, and gypsum.

Transportation cost

In the cement sector, the manufacturing facilities and end-user markets are considerable distances from each other. Cement plants are located near limestone reserves. As a result, cement has to travel a considerable distance to reach the end-users. Since cement is a low-value, high-volume commodity, transporting it to the end-user accounts for a significant portion of the cost for cement manufacturers—it constitutes more than 10% of the cost of sale. There are three key modes of transportation used by the cement industry—road, rail, and ocean freight. Road and rail contribute more than 90% of the transportation.

In order to control freight costs, companies strategically locate the clinker units closer to limestone reserves. The grinding units are set up closer to consumption centers because transporting clinker is cheaper than transporting cement. Blending material, like fly ash or slag, may not be available near the limestone reserve.

Selling and other expenses

Other expenses include employee costs, administration expenses, and repair and maintenance charges. These account for 15%–20% of the cost of sales.

The cost component averages have been calculated after studying the cost structures for cement manufacturers including CRH plc (CRH), Cemex, SAB de CV (CX), Eagle Materials Inc. (EXP), and James Hardie Industries SE (JHX). Investors can access the cement industry through the Vanguard FTSE Emerging Markets ETF (VWO).