Building materials economics: cost per tonne, delivered cost and carbon
What one tonne of cement costs to make and deliver, why the plant with the lowest delivered cost wins each city, how utilization moves cost per tonne, and what a carbon price adds.
Industry brief, with a one-minute summary: Building materialsKey takeaways
- Customers compare delivered cost: the cost at the plant gate plus freight to their site.
- Making clinker releases carbon dioxide twice: once from burning fuel to heat the kiln, and once from the limestone itself, which gives off carbon dioxide as it turns into lime.
- Worked case: Cost and EBITDA per tonne of cement.
- Worked case: Can a low-cost plant win a distant city?
- Worked case: Fixed cost per tonne at two utilization levels.
Key idea
Customers compare delivered cost: the cost at the plant gate plus freight to their site. A plant with a low gate cost can still lose a distant city to a slightly more expensive plant next door. So in building materials, think in tonnes, kilometres and kiln utilization.
Worked case
Cost and EBITDA per tonne of cement
The prompt
Kalinga Cement (a fictional company in Indonesia) sells cement at an average of USD 70 per tonne, delivered. Per tonne, power and fuel cost USD 20, raw materials USD 10, freight to customers USD 14, staff and other plant costs USD 9, and selling and administration USD 5. What is its EBITDA per tonne and its EBITDA margin? All figures are illustrative.
The structure
- EBITDA per tonne = price per tonne minus cash costs per tonneThis comes from the goal: profit per tonne, then times tonnes sold.
- Price per tonne (after discounts)
- Cash costs per tonne: power and fuel, raw materials, freight, plant costs, selling and administration
Working it through
1. Total cash cost
Add the five cost lines.
Cash cost (USD per tonne):20 + 10 + 14 + 9 + 5 = 582. EBITDA per tonne
Price 70 minus cash cost 58.
EBITDA (USD per tonne):70 - (20 + 10 + 14 + 9 + 5) = 123. EBITDA margin
12 divided by 70.
EBITDA margin (fraction):12 ÷ 70 = 0.17144. Energy and freight share
Power, fuel and freight together, as a share of price.
Energy and freight share of price (fraction):(20 + 14) ÷ 70 = 0.4857
The recommendation
Kalinga earns about USD 12 of EBITDA per tonne, a margin of about 17 percent, so any plan to raise profit should start with energy and freight. First, power, fuel and freight take about 49 percent of the price, far more than any other line. Second, this means a 10 percent rise in fuel prices costs USD 2 a tonne, a sixth of EBITDA, unless prices rise too. The risk is that cutting freight by selling only nearby lowers volume. As a next step, compare fuel cost per tonne and average lead distance with the two closest rivals.
Risks: Prices in a region move with the balance of local capacity and demand, not with costs; Fuel prices can swing quickly; a plant that can burn several fuels is less exposed.
Delivered cost decides who wins each city
Worked case
Can a low-cost plant win a distant city?
The prompt
Plant A (fictional) has a cash cost of USD 45 per tonne at the gate. Plant B, owned by a rival, has a cash cost of USD 52 but sits 20 kilometres from City Two, which is 350 kilometres from Plant A. Road freight costs about USD 0.10 per tonne per kilometre. Which plant has the lower delivered cost to City Two, and by how much? All figures are illustrative.
The structure
- Delivered cost = gate cost + freight per tonne per km x distance
- Plant A: 45 + 0.10 x 350
- Plant B: 52 + 0.10 x 20
Working it through
1. Plant A delivered
Gate cost 45 plus 350 km of freight.
Plant A delivered cost (USD per tonne):45 + 0.1 × 350 = 802. Plant B delivered
Gate cost 52 plus 20 km of freight.
Plant B delivered cost (USD per tonne):52 + 0.1 × 20 = 543. Gap
How much more Plant A pays to reach City Two.
Delivered cost gap (USD per tonne):(45 + 0.1 × 350) - (52 + 0.1 × 20) = 264. Break-even distance
How far Plant A can ship before its USD 7 gate advantage is used up, against a rival at the customer's door.
Distance where the gate advantage is used up (km):(52 - 45) ÷ 0.1 = 70
The recommendation
Plant A should not try to win City Two by road, because its delivered cost is about USD 26 a tonne higher than Plant B's, even though its gate cost is USD 7 lower. First, 350 kilometres of road freight adds USD 35 a tonne. Second, this means Plant A's cost advantage only lasts for about 70 kilometres beyond a rival's door. The risk is that cheaper rail or sea freight changes the answer. As a next step, check whether a rail link or a grinding unit near City Two would cut the delivered cost.
Risks: Rail and sea freight are much cheaper per tonne-kilometre than road, so a coastal plant can reach far cities; A rival may price below its full cost to keep its kiln full.
This is why cement makers build grinding units close to big cities: they ship clinker, which is denser and easier to move in bulk, from the kiln near the limestone, and grind it into cement near the customers, often blending in local fly ash from power plants or slag from steel mills. It is also why imports by sea can set the ceiling on prices in coastal cities, while inland cities are protected by distance.
Utilization: why a half-empty kiln hurts
Worked case
Fixed cost per tonne at two utilization levels
The prompt
A fictional cement plant has capacity of 5 million tonnes a year and fixed costs (staff, maintenance, insurance, overheads) of USD 75 million a year. What is the fixed cost per tonne at 80 percent and at 60 percent utilization?
The structure
- Fixed cost per tonne = fixed costs divided by tonnes produced
- Tonnes produced = capacity x utilization
Working it through
1. At 80 percent
Output 4 million tonnes.
Fixed cost at 80 percent (USD per tonne):75 ÷ (5 × 0.8) = 18.752. At 60 percent
Output 3 million tonnes.
Fixed cost at 60 percent (USD per tonne):75 ÷ (5 × 0.6) = 253. Difference
Extra fixed cost carried by each tonne.
Increase in fixed cost (USD per tonne):75 ÷ (5 × 0.6) - 75 ÷ (5 × 0.8) = 6.25
The recommendation
The plant should treat volume as its first lever, because falling from 80 to 60 percent utilization adds about USD 6 of fixed cost to every tonne. First, the same USD 75 million is spread over 3 million tonnes instead of 4 million. Second, against EBITDA of perhaps USD 10 to 15 a tonne, this means a slump in volume can wipe out half the profit. The risk is that chasing volume with price cuts starts a price war that hurts every plant in the region. As a next step, map regional capacity and demand to see whether the slump is ours or the whole market's.
Carbon: a new cost line
Making clinker releases carbon dioxide twice: once from burning fuel to heat the kiln, and once from the limestone itself, which gives off carbon dioxide as it turns into lime. The second part cannot be avoided by switching fuel, which is why cement is one of the hardest industries to decarbonize. The main levers are a lower clinker factor (blending in fly ash, slag or calcined clay), alternative fuels such as waste, more efficient kilns, and carbon capture. Where carbon has a price, as in the EU Emissions Trading System, every tonne of carbon dioxide becomes a cost.
A tonne of cement contains 0.7 tonnes of clinker (a clinker factor of 0.7). Each tonne of clinker releases about 0.85 tonnes of carbon dioxide. If carbon costs EUR 70 per tonne of carbon dioxide, what is the carbon cost per tonne of cement, in EUR? (Illustrative figures.)
An electric arc furnace mill makes rebar from scrap. One tonne of rebar needs about 1.1 tonnes of scrap. Scrap costs USD 380 per tonne and rebar sells for USD 600 per tonne. What is the metal spread per tonne of rebar, in USD? (Illustrative figures.)
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
My notes on this lesson
0 of 5,000 characters. Saves automatically.
Try the 2 remaining checks and drills above to complete this lesson (0 of 2 done).
Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.