The Hindu Business Line

Cement to stay soft for now

Price appreciati­on likely in southern, western markets over next one year

- MUTHUKUMAR K

Cement prices have been up by 2.7 per cent in the last one year — with the northern region witnessing the maximum appreciati­on of 20 per cent. The price for a 50-kg cement bag was hovering at ₹300-335 across the country. While prices were up marginally (3-7 per cent) in the West and South, they remained flat in the East.

Demand is expected to exceed supply in the next few years, thanks to a slowdown in capacity addition, creating the ground for better price appreciati­on in the future. During FY17-20, capacity addition of the industry would be about 33 million tonnes (mt) (as against 70 mt in the last three years), which would translate to an annual growth rate of 2.5-3 per cent for cement demand.

Over the next six months, demonetisa­tion is expected to affect cement demand, with Q3 and Q4 more likely to report negative growth in despatches. This, in turn, is expected to pull down overall demand growth figures to around 3 per cent levels for FY17. But any revival in demand is expected to improve volume growth to 6 per cent or more levels from FY18 onwards. If revival takes place, then demand will exceed supply each year until FY20. Cement demand has a strong correlatio­n to economic growth — with a one percentage growth in the economy resulting in a 1.2 per cent growth in demand for cement. The last four years have been an anomaly, though — when cement demand clocked average annual growth rates of only 4 per cent. This, in turn, resulted in low capacity utilisatio­n of 66 per cent for the industry.

Drivers

Rural housing (40 per cent), urban housing (25 per cent) and infrastruc­ture (20 per cent) are major demand drivers for the cement industry. Ballpark estimates put the overall structural impact of demonetisa­tion at 15 per cent of the cement market. While the North and Central markets would be impacted the most, a better monsoon, recent MSP increase as well as government thrust on the rural economy are expected to keep the demand robust for rural housing. Roads and railways are already witnessing increased allocation­s from the government — boosting infrastruc­ture-related demand.

Pricing environmen­t

Many regional players have scaled up operations in recent times — in the process adding to debt. With volume growth remaining poor in the last three years, these players face the challenge of servicing debt-related payments. This is expected to usher in price discipline.

Consolidat­ion is taking place in North and Central regions, giving large cement producers the much-needed pricing power. In the north, Ultratech and Shree Cement already account for 40 per cent of overall capacity in the region. And with the purchase of volume-focussed Jaypee Cement by Ultratech in the Central market, the latter has 30 per cent market share in the region.

However, the pricing could be affected by the trajectory of power and fuel costs for cement producers. Till six months back, cement producers benefited from lower petcoke and diesel prices. Many cement manufactur­ers substitute­d coal with petcoke, with prices of the latter falling in the global market. However, with petcoke prices doubling since March 2016, most of the cost advantages have been erased. Any further pick-up in crude oil prices could further increase raw material and transporta­tion costs, which could put pressure on existing prices.

Up or down?

In the North, with prices having already appreciate­d sharply, it will remain subdued going forward. Demand in the near term will be affected by demonetisa­tion, since housing transactio­ns in Tier-2 and Tier-3 markets are largely done in cash.

The East is witnessing large capacity additions. This is expected to keep prices under pressure. Over the years, the region has lost the premium it enjoyed against other markets.

The South has been relatively less impacted by the effect of demonetisa­tion — thanks to the higher share of institutio­nal and organised players.

It is likely that prices will pick up in the West — especially from a lower base (₹300) as compared to other markets. Good monsoon and higher share of organised market should keep prices firm. The western region has not seen any capacity additions in recent times.

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OKCM/SHUTTERSTO­CK.COM

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