Sucheta Dalal :Cement prices may come under pressure from April
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » What's New » Cement prices may come under pressure from April
                       Previous           Next

Cement prices may come under pressure from April  

March 19, 2010

Cement prices have skyrocketed over the past few months. However, analysts predict a fall in prices in April-May due to more capacity addition. Though the fall is likely to be gradual, the long-term movement of prices will depend on the decisions taken by the major players in the cement sector.


The recent increase in cement prices over the last couple of months with improved off-take due to a pick-up in infrastructure activity is a positive phenomenon for the domestic cement industry. "On the volume front, we expect a sequential improvement due to a pick-up in urban construction and real-estate activity. However, with the stabilisation of the new capacities, the supply is expected to surpass the incremental demand, which will create pressure on utilisation and consequently on cement prices," said Sharekhan Ltd in a research note.


During February, the Indian cement industry posted a moderate 4.3% year-on-year (y-o-y) growth in despatches, riding on healthy demand from the central and western regions. The cement despatches were up by an impressive 13.9% and 8.5% in the central and western regions, respectively.


However, during the same month, all-India capacity utilisation declined to 83% from 92% in the same period a year ago. The decline was highest in the southern region, which recorded utilisation of 69% from 88% last year. The central region however, registered an increase of about 10% to 107% in capacity utilisation buoyed by strong demand arising from the infrastructure and real-estate segments.


According to an analyst with a leading brokerage, who preferred anonymity, companies that have commissioned their capacities in January will witness an increase in capacity utilisation which will in turn impact the volumes in April-May. Till January 2010, 10 million tonnes (MT) of new capacity has been added at an all-India level, he said.


Any planned capacity in cement takes around three to four months time to start operating at higher capacity utilisation levels. Dalmia Cements, India Cements, JP Cement and Grasim Cement are some of the companies that have commissioned their capacities in the past few months.


"Capacity utilisation will increase to 50%-60% in a matter of six months. Also, as we enter the April-May 2010 period, the cement demand that is growing at double-digit growth of around 11%-12%, will also be subdued," said Amit Srivastava, research analyst, Karvy Stock Broking Ltd. He further stated that region-wise, demand in the northern region will start decreasing, as demand from the Commonwealth Games construction activities will end by June-July 2010.


On a long term, basic cement demand is likely to grow at 9.5% to 10% in FY2011. While cement prices are likely to fall owing to capacity additions, the fall is expected to be a gradual one.


"The fall in cement prices would be gradual. Also, companies will start planning their capacity utilisation levels depending on the demand. In the long term, if they are able to achieve this demand-supply equation, cement prices will stabilise. However, companies will be able to reduce their utilisation levels only up to the point that their fixed costs allow them to do so," added Mr Srivastava.


Emkay Global Financial Services Ltd, in a note said, "Though we remain bullish on cement demand (factoring in 10% y-o-y demand growth over FY2010-12E), we expect the bunching up of capacities in Q2FY11-Q3FY11 to put pressure on cement prices. We expect close to 48MT per annum of new capacities to be added over H2FY10 and H1FY11. The steady ramp-up in utilisation of new capacities coupled with the onset of the monsoon is expected to see a reversal of the sector’s recent pricing power by Q2FY11. Overall, we expect the cement surplus in FY2011 to jump three-fold to about 22MT per annum as compared to 6MT per annum in FY2010. Hence, we believe that cement prices are unlikely to cross the previous highs of Rs257 (reached) in mid-July 2009." — Amritha Pillay

-- Sucheta Dalal