Outlook brightens for cement

With capacity additions slowing, excess supplies may fall

Over the last few years, the cement market has been dogged by excess supply and a demand slowdown, and prices have therefore increased much more slowly than the inflation in their input prices.

Consider these trends. Since 2011-12, in North India, cement prices have moved up at an annual rate of 3.5 per cent. In the West, prices have risen at a rate of 5-7 per cent a year. In the East, the annual increases have been 6.5 per cent.

The cement industry is basically struggling to live down the effects of large capacity additions made during the previous economic upturn.

The Government’s increased spending on rural housing, road and railway infrastructure, combined with the growth in private capital spending and the increase in disposable income saw cement demand grow at an annual rate of 10 per cent between 2005 and 2008.

Cement prices rose by 10-12 per cent annually in this period and manufacturers saw profit margins expand.

They used these surpluses to create new capacities. The country’s cement capacity increased by almost 100 million tonnes in the three years from 2008 to 2011 to 290 million tonnes. However, with the economy slowing sharply and unexpectedly, cement demand dropped from 2011 and manufacturers have lost much of their pricing power.

Will prices go up now?

For cement prices to go up, a better demand-supply balance is required, and this is likely to happen soon.

There appears to be a slowdown in capacity additions.

Industry reports say that from about 25 million tonnes of capacity added in FY14, new capacity additions will slow down to 22 million tonnes, 19 million tonnes and 14 million tonnes in FY15, FY16 and FY17, respectively.

Two, in the next three years, demand growth is also expected to pick up as the new government prioritises housing and infrastructure building.

A declining rate cycle is also likely to spur housing demand. If the government keeps up the promise to revive the capex cycle and increases spending on infrastructure and building satellite townships, demand may well grow by 7-9 per cent annually. This would still not use up all the cement capacity.

But capacity utilisation may improve from the current 73 per cent to 79-80 per cent in FY17. This can aid prices.

Noopur Jain, Assistant Vice President, ICRA, says cement manufacturers will definitely see pricing power improve.

“With demand-supply gap narrowing, players should be able to increase prices.

Even if they do not enjoy strong pricing power as they did in 2007 or 2008, it is definitely going to be better in the next six months to one year than what it is now.”

In this situation, the only factor that can bring about a sustainable improvement in prices is consolidation of capacities.

In the last two years, we have seen JP Associates selling some of its capacities in the north to UltraTech.

In 2012, Dalmia Cement acquired stake in two companies -- Calcom and Adhunik Cement, both in the East.

Current trend

Meanwhile, there has been a seasonal recovery in cement prices across regions in recent months. In Delhi, for instance, retail cement prices climbed to about ₹288/bag in October from ₹268/bag in September. After a pause, in January, prices zoomed to ₹285/bag. Cement prices have rebounded in most regions in January by 4 to 14 per cent — the least increase was in Kolkata and the highest in Mumbai. In Mumbai, wholesale cement prices increased from ₹320/bag in December to ₹364/bag in January.

In the South, while prices in Hyderabad have risen from ₹321 to ₹350/bag, in Chennai too there has been an increase from ₹375-380 levels to ₹390/bag. Logistical bottlenecks have also contributed to the recent price rise, says Madhusudan Shah, President, Cement Stockists & Dealers Association of Bombay.

“The increase was largely because supply was hampered because of shortage of wagons as many were diverted for transport of fertilisers.

Actual demand pick-up may take a little more time.”

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