Cement: Problems of excess in the South - Views on News from Equitymaster

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Cement: Problems of excess in the South

Apr 9, 2010

Price is a function of demand and supply. Everyone is aware of this. If demand is in excess of supply, then price of that product rises. Since one is ready to pay higher price to get that product. If the situation is the other way round- supply exceeds demand, then prices fall. This means that consumers hold the bargaining power. Suppliers lower the price to push volumes. A similar situation was witnessed by cement manufacturers in the South. Growth over the years...
The average demand growth in the southern region has been around 11% over the past three to four years. The higher demand was the result of booming growth in real estate and infrastructure. Considering the growth and easy availability of raw materials, players lined up capacity expansion plans. And that amidst the economic slowdown pulled down the prices.

Southern region Unit FY05 FY06 FY07 FY08 FY09
Capacity m tonnes 49 51 44 62 78
Industry share % 31.6 31.8 27.9 31.2 35.5
Growth in consumption % 4.3 17.7 13.8 9.7 10.8

Reversal in price trend...
In the recent past, the Southern region witnessed a sharp fall in cement prices owing to excess supply. The cement sector reported single digit growth of around 4% YoY during 9mFY10 and the spot prices reported 5% YoY fall during the same period under consideration (Source: Dalmia Cement (Bharat) India Ltd.)

The fall in price is primarily the result of slower growth in demand and excess supply. The region added nearly 7 m tonnes (MT) of capacity during 9mFY10 taking the total capacity to 85 MT. It is expected that the region would see its capacity scaling up by another 11 MT by the end of FY10.

The reversal in cement price trend was not the only result of capacities ramping up within the region, but was also due to slower growth in demand. The demand within the region slowed down on account of economic slowdown and political instability in Andhra Pradesh towards the end of 2009. The demand was also affected on account of retreating of monsoons and lower infrastructural spending. Thus, demand in other southern states such as Karnataka, Kerala and Tamil Nadu were impacted on account of lower construction activity.

Way forward...
However, December 2009 onwards the demand scenario has been improving. This is primarily on account of uptick in construction activity. Moreover, the bulk of the capacity additions have taken place and delays in upcoming capacities and ramp ups is likely to lead to a moderate pricing scenario. With the end of the election season, construction activity is back on track. This is on account of the government's thrust on infrastructure growth to drive demand (urban development and upliftment of rural areas). Logistics issues such as availability of trucks etc are getting streamlined enabling cement dispatches. Thus, long term demand prospects remain positive. Prices have already bottomed out and are less likely to see any further sharp correction. In fact with demand picking up prices are expected to stabilise.

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