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Cement: Have prices bottomed out?

Aug 19, 2002

Cement industry today is facing a peculiar situation with a healthy demand but poor prices. The predominant question in investors mind today is whether cement prices are going to fall further. We look at the cement price determinants and their likely impact on prices in the short and long-term. In the short term, i.e. in the next two quarters, the glut is likely to continue and hence cement prices will suffer. However, in the long-term prices are likely to improve, as there are very few capacity additions expected going forward. The only major capacity that is expected to come up is the 2.5 m tonne Greenfield plant of Sanghi Cement. Lack of capacity additions is likely to stabilise the demand supply situation and boost prices.

Cement: YoY change in realisations
  FY02 1QFY03
Grasim 4% -15%
L&T 4% -17%
ACC No change -13%
Gujarat Ambuja* -7% NA
* June year ending

The other major determinant of cement prices is demand. Demand for cement has been strong in the current year largely due to good housing demand as well as large scale infrastructure spending. Cement demand is likely to remain buoyant on account of consistently falling housing loan rates, which is likely to encourage higher spending on housing despite poor monsoons. Huge funding commitment towards the infrastructure projects coupled with a large number of projects already underway is likely to ensure that demand from this segment is buoyant.

The other major determinant is formation of the cement cartel. In FY02, the cement cartel that was formed in the latter half of the fiscal totally collapsed in the last quarter. The major reason for this was the fact that large capacities came on line in the second half of the fiscal. Prices came under further pressure as major cement producers decided to increase market share due to a better demand environment. Higher volumes came at the cost of realisations.

In the short term, an understanding between players seems unlikely as the focus still seems to be on increasing market share. But in the long-term unremunerative prices is likely to force an understanding between cement majors. Having said that, the stability of a cartel will depend to a large extent on the consolidation in the industry. In the past cartels have broken due to undercutting by smaller players. Falling realisation could fuel further consolidation, as profitability becomes the function of size and reach in the market.

Poor overall market conditions and falling realisations have pushed valuations of cement companies to low levels. Prices seem to have bottomed out and this may just be the right time to invest in stocks with sound fundamentals and a definite focus towards the industry.


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