Indian prices fall on poor demand and oversupply

Indian prices fall on poor demand and oversupply
Published: 12 November 2009

The fall in Indian cement prices, which started in August, is gaining momentum in southern India. Despite strategies to counter this, the two southern cement companies—Madras Cements Ltd (MCL) and India Cements Ltd (ICL)—will take a hit in revenue realizations and profitability during the next two quarters.

Due to poor demand and oversupply, cement prices fell by nearly Rs15-23 per bag in the south in the last fortnight. Hyderabad has been the worst hit, where prices fell by 15%. According to a dealer who declined to be named, cement in Andhra Pradesh is now around Rs135 a bag and around Rs160 in Tamil Nadu and Karnataka. On the whole, cement prices in the south are down 40-42% from peak levels in April. That’s compared with a drop of around 20% in the northern and western parts of the country.

The political instability in Andhra Pradesh since September, low infrastructure spending in Karnataka and Kerala and the onset of retreating monsoons in Tamil Nadu are the factors expected to keep demand in the south muted for the next six months. Even in the first half of the current fiscal that began in April, demand in the south grew by only 4.1% year-on-year, compared with 12.6% all over India.

With capacity expansion coming on stream in the next 12 months, capacity addition in the region could be around 15 million tonnes (mt) each in the current fiscal and the next, whereas additional despatches are estimated at only around 7mt each for the two years.

“Cement inventory levels have shot up from 15 days six months back to about two months now,” an analyst said on condition of anonymity. Dealers anticipate an additional 5-8% drop in prices till December. A report by financial services firm India Infoline Ltd says, “We estimate Ebitda (earnings before interest, taxes, depreciation and amortization) loss for selling price below Rs120 per bag, given that cost of production is Rs85, freight Rs7, excise duty Rs11.5, state VAT (value-added tax) Rs13 and dealer commissions and other sundry expenses are Rs3.” Ebitda is a key indicator of a company’s profitability.