Mar 21, 2003|
Cement: Woes to continue?
It has been a rather difficult year for cement companies. Though volumes have grown at a impressive rate during this fiscal, excess supply in the market weakened prices significantly. Going by the trend, the near-term pricing prospects continue to remain cautious. It will take some time before the demand-supply mismatch, which the industry has had to contend with for the last few years, evens out.
As can be seen from the graph below, it has been a good year for the cement sector, in terms of volumes. For the first ten months of the current financial year (i.e. April-January 2003), production and consumption has increased by 9.6% and 10.5% respectively. If one were to look at the monthly trend in production and consumption, there was a sharp spurt in June 2002. This is because of commencement of production at Gujarat Ambuja's Chandrapur plant in Maharastra. The company despatched more than 0.2 m tonnes of cement in June-July 2002, which accounted for 2% of total consumption during the period under consideration. Besides, demand for cement has been robust in light of the government's thrust in road infrastructure and a buoyant housing industry.
However, the pricing environment has not been favorable for cement majors, especially in western and southern markets. In Mumbai for instance, cement prices in September 2002 stood at Rs 129 per bag as compared to Rs 154 in January 2002. Similarly in Vijayawada, per bag prices plummetted to less than Rs 110 in September 2002 as compared to around Rs 140 in January 2002. Having said that, prices have shown a sharp upturn since the lows in 2QFY03, which is also reflected in the graph below. Overall, for the first ten months, CMIE numbers suggest that per bag prices are lower by 11% in Mumbai market alone. This goes to show the magnitude of impact on cement players.
Our interaction with the industry last month suggested that the existing supply-demand mismatch (supply is higher now) is expected to get absorbed in the short-term. However, with Sanghi cement in the process of expanding cement capacity, we expect the weakness in price to continue for atleast one year. Consequently, unfavorable demand-supply equilibrium will subdue revenue growth in FY04 as well. In the long run, as we have maintained before, the thrust on infrastructure and a robust housing sector will continue to result in a stable volume growth of around 7%-8%. Also, given the intensity of competition in the sector, consolidation is expected to gain momentum. As a result, players like Gujarat Ambuja, ACC, Grasim and L&T are well-poised to capitalise on the opportunity.
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