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Cement: Back in limelight

Nov 29, 2000

First came the news that cement dispatches in October had jumped 15%. This was followed by announcements of supply cuts and hike in prices by leading companies. Expectedly, cement stocks witnessed a flurry of activity. Indeed some cement stocks have gained as much as 40% over the last few weeks. One must surely be wondering that if cement companies had the option of effecting supply cuts, why did it not so earlier in the year when the droughts and the floods created excess supply in the markets. The answer to this is excessive fragmentation in the sector. This is also the cause for most of the other ills that plague the cement sector. How did they then manage to affect the supply cut?

Well, for one, the Indian cement market is getting consolidated, albeit slowly. The most important development in recent months has been the acquisition of an over 14% stake in ACC by Gujarat Ambuja (GACM). The combine now controls 20 million tonnes of capacity (approximately 20% of total domestic production). Not surprisingly, ACC and GACM have taken the lead in raising prices. L&T, with 14 million tonnes of capacity, is another company, which has affected a hike in prices.

Cement companies have had a roller coaster of a ride over the last two years. Now, however, as the industry consolidates one can expect to see some semblance in terms of pricing. Given that the monsoons were not to disappoint, cement demand should continue to grow robustly. Construction activity continues to remain robust, and with the work on massive road projects gaining momentum demand for cement should only rise in the coming years. Supply on the other hand will remain under control, as fresh capacity under construction is minimal.

Does that mean the cement stocks will continue to log in large gains on the bourses? One reason why cement stocks have had a run up is that after the drubbing they received over the last few months, an upward correction was only to be expected. Then the rise in cement prices had its impact on market sentiment. The jump in dispatches in October also played a role in the change of market outlook towards cement stocks.

Cement stocks will probably find many takers in the coming days. However, what will determine whether or not the rally lasts will be the success of the ‘cartel’ is controlling prices. Any disappointment on this front could once again create a scenario of rising demand and falling prices, as witnessed last year. In such a scenario, expect the interest in cement stocks to wane.

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