Oversupply in cement could squeeze margins in FY10

Oversupply in cement could squeeze margins in FY10
Published: 18 May 2009

Over-supply in cement in FY10 could depress prices and squeeze margins by 2-5 per cent, estimate research analysts. The cement industry will add 40-45Mt of capacity this financial year, increasing capacity by 21 per cent.

The industry had an installed capacity of 212Mt last financial year, while consumption was 176Mt. Already, 7Mt of supply has been added till April 2009; another 20Mt will get added this financial year.

“We expect cement prices to decline sharply from the third quarter of FY10, when the newly-commissioned cement plants stabilise,” said J Radhakrishnan, an analyst with brokerage firm India Infoline, in a recent note to investors.

Analysts expect prices to decline by Rs5-20 per 50 kg bag, depending on the supply that is coming in. Cement makers hold a similar view. Ashish Guha, MD, Heidelberg Cement, expects prices to soften by Rs10-15 a bag this year.

Thus, prices could fall 6 per cent from the average price of Rs242 a bag in the country, which is line with the analyst expectations. “If prices come down 5 per cent, operating margins of cement companies could fall 200-500 basis points,” said Kamlesh Jain, a cement analyst with brokerage firm Prabhudas Lilladher.

A large number of new projects are in the pipeline, which is likely to add 40-45 MT of cement-making capacity in FY10. Some of these projects may have been deferred, but the bad news is that all this capacity will come by March 2010 as many of the projects are in advanced stage of completion.