Indian cement producers are facing the impact of overcapacity together with pricing pressures and higher input costs.
Every year, cement prices soften during the monsoon as lower construction activity results in lower cement offtake. A report by Live Mint, however, shows that this year, cement prices fell much before the onset of the monsoon. By end-April, they were down Rs10-20 per bag in almost all regions.
Currently, prices are down by Rs40-60 per bag compared with that in April. Prices range from around Rs220 per bag in the southern and central regions to Rs250 per bag in the northern region and Rs270 per bag in the eastern part.
Lower demand from realty and infrastructure segments led to single-digit growth in cement despatches from February. Harikrishna Katragadda/Mint Analysts say that lower demand from the real estate and infrastructure segments led to single-digit growth in despatches from February onwards. A report by Angel Securities says, “Cement despatches grew at a lower 8.1% year-on-year (YoY) in May 2010, as against 10.7% YoY growth in May 2009.”
Unfortunately for the industry, the sluggishness in demand coincided with the commissioning of new capacity. Around 20Mt of capacity were commissioned in April-May alone. This was on the back of an addition of 45Mt in capacity in fiscal 2010. Evidently, the excess supply situation has driven prices down faster than expected.
Capacity utilisation in May declined nearly seven percentage points on a YoY basis to 82%. This, coupled with rising costs of coal and freight, will impact operating profit too. Some analysts estimate that the operating profit during fiscal 2011 could be lower by 5-6 percentage points from the average of 24-26% in 2010. Stock prices, too, reflect this sentiment. Most cement stocks, barring Ambuja Cement Ltd, have underperformed the market since April.
The extent of price correction is the largest in the south, with 40% of capacity additions being in this region. Prices are expected to be relatively stable in the northern and eastern parts of the country, thanks to stable infrastructure-related activity. The central belt may suffer as southern producers push surplus production into the central region.