Cement prices - along expected lines! - Views on News from Equitymaster

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Cement prices - along expected lines!

Dec 15, 2009

The Indian cement industry with a total capacity of about 200 m tonnes (MT) in FY09 is the second largest market after China. Cement sector has been under the government's lens for quite some time. As the weightage awarded to the commodity is 1.73% in WPI composition, it has been closely watched by the policymakers. Despite government's appeal to cement manufacturers to not resort to unreasonable price hikes, price per bag of cement has kept inching upwards. This is mainly on account of two counts namely - increase in input costs such as coal, gypsum and secondly, sustained demand for the commodity. But perhaps not anymore. Planned capacities have started coming on stream and as per CMIE, since April 2009, the industry has added nearly 27 MT of fresh capacity. The bulk of this capacity has come in the state of Andhra Pradesh, leading to a sharp decline in average cement prices in past few months. By the end of FY10, the industry is likely to add another 30 MT capacity taking the installed capacity to 280 MTPA. With new capacities becoming operational, cement realisations would come under pressure, which in turn would dent profitability of the companies.

Pricing pressure - not a surprise...

This was expected and has started taking place. While year on year basis realisations are still firm, month on month basis they have started reporting stable to declining trend in prices per bag of cement.

Source: CMIE

From the chart above its visible that cement prices that started soaring post 2006 monsoons have stabilized in the recent past. In fact, in the past three months, the average prices have declined marginally and in October, the average price per cement bag hovered around Rs 249, lower by Rs 6 MoM. In few regions such as Hyderabad, the average cement prices were hovering at a 3-year low at around Rs 167 per 50 kg cement bag. Also, prices in Andhra Pradesh have crashed by Rs 60 per bag owing to massive capacity addition witnessed by the region.

Not only the result of upcoming capacities, but demand supply scenario…

Cement prices are not regulated, they are market determined. The change in prices is the result of demand and supply scenario. The uptrend in the cement prices was the result of demand growing at a faster rate as compared to supply. The then booming economy had boosted cement consumption, while supply failed to match demand for the commodity at a point of time. This resulted in firm cement prices.

A look at the chart below would clarify this. Earlier, growth in consumption outpaced production then stabilized as economic growth slowed down impacting cement offtake by end user industries such as real estate, construction and housing. And recently as capacities have started coming on stream supply is set to outpace growth in demand. The supply side pressures are expected to widen as industry is building huge capacity to satisfy the long term demand for the commodity. However, these upcoming capacities will exert pressure downward pressure on realisations in the medium term. This is despite the fact that investments in infrastructure, real estate and housing and construction activity have started to gather momentum once again, which in recent few months was impacted owing to global recessionary trend and on account of credit crunch problems.

Source: CMIE

Having said that...
...while the near to medium term growth prospects have been impacted by the economic slowdown, the long term growth story remains intact. This is mainly on account of government initiatives in the infrastructure and housing sectors that are likely to be the main drivers of growth for the industry in the long run. Further, the government's recent moves such as infusing capital, lower interest rates for new home loan disbursals, plan to increase infrastructural funding etc., is expected to limit the impact of the slowdown. However, execution and implementation is the key.

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