Capacity addition by cement companies make investors nervous

Capacity addition by cement companies make investors nervous
Published: 05 October 2009

A report by the Economic Times of India says that cement stocks have underperformed the broader market in the past six months, on worries that the industry is heading towards excess cement stocks supply. While the cement industry has shown robust growth in despatches even during the monsoon season, which is typically a period of sluggish demand, investors are increasingly nervous about the possibility of a supply surplus over the next 18 months.

Poor sentiment resulted in ACC stock price
which grew by just 40.5% over the past six months as compared to 73% rise in the benchmark Sensex. Ambuja Cements also gained just 42.7% during this period. However, Grasim bucked this trend and rose by 74.5% during the past six months, as investors await details of the planned restructuring of its business.

However, in the short term, it does appear at first glance that the key growth drivers for the cement industry — namely government-funded infrastructure projects and housing projects in smaller towns and rural areas – are still strong. This enabled total industry despatches to grow 17% during August 09, while in July, despatches grew 10.7%. This growth compares favourably with the 8% growth in despatches during FY 09. In addition, the cement industry has benefited from a moderation in costs for key inputs, like power and fuel in the September 09 quarter.

The cement industry’s capacity at the end of FY 09 was 218Mt, with utilisation levels of 88%. In the cement industry, players typically raise prices when capacity utilisation crosses 85%.

As per estimates by brokerage houses, 25–30Mt is expected to be added in FY 10, followed by another 30Mt in FY 11. Amidst this pan-India ramp-up in cement capacity over the next 18 months, production capacity in the southern region is set to rise amongst the fastest in the country. Analysts point out that capacity in the southern region is expected to reach about 120 million tonne in FY 12 from 78 million tonne in FY 09. The impact of rising cement supply is already being felt in some southern markets. For instance, in Hyderabad, prices are currently at Rs 190 – 200 per bag, down nearly Rs 30 over the past few months.

In other key markets like Mumbai, prices are currently at Rs 255 per bag and have declined by Rs 5 per bag during the monsoon season, but they are still stronger compared to a year ago. In New Delhi too, prices at Rs 240 per bag, have been stable. But the ramp-up in cement capacity is expected to bring down utilisation levels of the cement industry to around the 79% levels by FY11 as growth in demand is expected to lag supply, estimates by brokerage houses show. However, utilisation levels in the cement industry could get a boost in the medium term if the government were to announce fresh measures to develop infrastructure in the country.