Recent capacity additions likely to soften cement prices, India

Recent capacity additions likely to soften cement prices, India
Published: 02 May 2008

The Indian cement industry has added close to 15Mta capacity in the last quarter, including 10Mt in March alone, resulting in moves that might bring down cement prices in the near future, reports the Economic Times of India.
"With so much of new capacity coming on stream, the supply may increase more than the market can absorb. In this scenario, prices may come down," says Ambuja Cement MD AL Kapur. Around 70% of the total 22Mt of new capacity that came on stream in fiscal 2008 was added in the last quarter. "The delay in execution of some projects results in bunching of capacities," says Shree Cement MD HM Bangur. The total cement installed capacity as of March-end is 189Mt.
While it is feared that new supplies may hit cement makers’ net realisation, companies are on course to add another 18Mt in the current fiscal and 29Mt in 2009-10. "Cement companies are more bothered about market-share than profitability. Since cement is a cyclical industry, manufacturers rely on marketshare to ensure a smooth ride during a downturn," says Rupesh Sankhe, a cement analyst with ICICI Direct.
Cement production grew 8% to 168Mt last fiscal, while consumption grew at 10%. The average price growth was 11% during the year. The new capacities and ban on export - India exported 3.65Mt last fiscal - will ensure a much larger supply to the domestic market this year. Analysts estimate that with GDP growth at 8%, cement demand is likely to remain at 10%.
Much of the capacity addition has happened in the north and south, mainly because of the availability of limestone reserves. Rajasthan accounted for 4.6Mt, while Andhra Pradesh, Karnataka and Tamil Nadu together added close to 6Mt. In the west, Gujarat and Maharashtra have added 3Mt. Analysts say north and south will have surplus supply of cement. Cement prices are expected to remain stable in the west, as the export ban will result in enhanced supplies to the region.
"The entire Gujarat cement industry will be affected due to the ban on export. Industry here will have the choice to either cut production or spoil the market rate," says Mr Kapur, adding that the entire export market share, which the Indian industry had earned with so much effort, will easily pass on to the Pakistani manufacturers.
The cement industry has been mired in controversy for more than a year since the government started accusing it of cartelisation following a steep hike in the commodity’s prices. Despite the government’s warnings, excise duty rejigs, and complete waiver of import duties, the cement prices haven’t come down. Meanwhile, rising input cost, too, has fuelled price hike. Ambuja Cement says its cost has gone up by 30% in a year, mainly due to rising coal cost.
Source: Economic Times of India