Indian prices expected to correct

Indian prices expected to correct
Published: 07 April 2011

Anil Singhvi, Chairman, Ican Investment Advisors says although cement prices have risen, demand is yet to pick up, leading to a correction in cement prices shortly.

In an interview with CNBC-TV18, he said  these prices will not sustain more than a month or two because demand is not backing up prices. “I think the price correction could be as high as INR20 or even more in some pockets”. He further says, in the next couple of quarters, cement producers will face margin pressures.  Below is a verbatim transcript of the interview.

Q: What is happening on the cement pricing front because we heard about pretty sharp price escalation? Is that still flowing through or have prices subdued somewhat?
A: I think the prices have seen quite a bit of ‘yo-yo’ in last about five-six months. So, when you look at prices today, they are much better than what they were a couple of months back. But having said this, the demand side of cement is still not picking up, in fact this year we are going to end-up with around 4.5-5% and in this month also it’s going to be around same 4.5-5%. So, my concern is more that right now industry seems to have overcome this factor of low pricing which were there around August-September and come up very well in last three months. But I don’t think these prices will sustain more than a month or two because demand is not backing up prices.

Q: What about the demand-supply situation though? Supply has picked up considerably over the last few months and there is more coming. How do you see in about six month time this whole demand-supply equation?
A: To a very large extent, the country has to be divided into four parts because India is too larger country from cement demand and cement supply perspective. I think South will continue to have supply pressures, North is having a little bit of a supply pressure on account of new capacities coming up. So, on the whole, I feel that there will still be supply pressure. But the industry has to some extent been able to manage keeping prices high by having low utilisation. But it has not worked well in terms of demand. Had the demand kept the pace of about 9-10% then this would have sustained for a much longer period. But the pricing scenario will be too fragile in a month or two months time.

Q: What kind of a come off in prices are you expecting in couple of months time?
A: In the past, the tendency has been that cement prices can come off by Rs 15-20 or even more because we will have only just about two-and-a-half to three months maximum for the peak construction period before we set into monsoon. Still in many places capacity utilisation is not more than 70-75%. So, I think the price correction could be as high as Rs 20 or even more in some pockets.

Q: How much margin recovery would you expect to see though?
A: Cement is energy intensive. So, the prices of coal, power, excise duty going up, all that including transport costs and I expect again a diesel hike are going to make cost side of cement industry looking up very difficult to pass it on to the customers. Whatever price increases could have come in last two-three months on account of both busy season and more importantly industry trying to go through a low utilisation and keeping the pricing discipline, I think we are end of that. I expect cost side pressures to remain and prices to come down. So, my expectation in the next couple of quarters the industry will go through a bit of a margin pressure.