The talks of INR10 per bag increase in cement prices in Mumbai did move some of the cement stocks yesterday, but where is the sector headed? Talking about the outlook of the sector, Ashish Guha, MD, HeidelbergCement told CNBC-TV18 that oversupply in the sector will keep prices soft. The entire June-August quarter had not seen any mentionable price recovery, primarily due to oversupply and the situation is likely to continue until June 2011.
He does not see any uptick in prices in south India in the near future.
Q: Are prices really going up or is it a Bombay specific phenomenon, it’s not picked up nationally?
A: Prices are generally soft; the bias is negative, except in some parts of the country. South remains grave concern area. Some amount of correction is happening from a very low base after steep correction of 15-18% from the peak, little bit of price movement upwards doesn’t make any sense.
Maharashtra has been stable compared to the other states; the correction has been 6-8% in that region. Bombay, specifically, has been more insulated and a little bit of upward movement is just about expected. People were selling close to their variable cost. We have been expecting some kind of stability and then movement upwards, but the rains are not helping either. So, we will have somewhat difficult month in August and probably from September we should see a turnaround.
Q: To understand this price recovery better, how much did prices fall in June and how much have they recovered in the early part of August?
A: From June to August, we haven’t seen any kind of significant recovery. At best it’s flat in most markets and in some markets it’s actually fallen. The Central markets were fairly insulated from the other parts of the country all over this year, but off late we have seen some bit of correction. They are not significant, they are minor, but the perception goes negative.
What is happening in the growth that we expected in the cement sector to be about 10%, consumption is no where near it, and it is flattish growth over last year. So, we expect in the next quarter, we should see huge amount of growth coming in terms of infrastructure spend etc. So, the next two quarters should be significantly improved quarters for us.
Q: The observation on pricing also seems to be that there isn’t that much stickiness to it. So, even if prices recover towards September, they may not hold at that level for very long. Would you agree with that observation?
A: Quite, in the sense that so much of capacity has come up in Andhra and they are moving left, right and centre to flood their cement in various areas, which is about even a 1000km away from them is actually affecting the market. So, the bunch up of capacity, which happened, about 20Mt is actually spreading its wings all over the country.
Having said that, prices have fallen so sharply and we haven’t seen any significant demand uptick, we expect in the next quarter we should see some demand uptick. If that happens, you should see some kind of corrections that have happened from peak of 15% to recover by 5-7%, which is quite significant.
Q: What is your assessment of the national demand supply picture because there is quite a bit of supply which has come in and there is some which is waiting in the wings? Do you see this mild oversupply continuing or lingering for another four-five quarters?
A: I think till June of next year, mild over capacity and thereafter from there we see capacity utilisation in most regions, other than South. South will be under pressure for a little longer to be in the range of 85% and that is stable price zone kind of a region.
In South, we expect that to come up from 50-55% to about 65%. When I say South, I am mainly talking about Andhra Pradesh which has got this capacity come up. So, the bunch up has actually affected.