Cement manufacturing companies are facing a tough time in the current quarter as cement prices move south, while the cost of power and coal move north. Apart from the increase in the cost of production and little or negative rise in cement prices all over India, cement companies are also likely to face a glut in 2008-09 and 2009-10.
According to the latest research report on the cement sector by Edelweiss Research, all-India utilisation levels are likely to correct to 94 per cent in FY09 (estimate) and 84 per cent in FY10 from 101 per cent in FY08.
The cement sector is estimated to move from a deficit of about 2Mt in FY08 to an excess of 12Mt in FY09. Price hikes are expected till Q1 FY09, but prices are likely to correct or stagnate thereafter.
Though the shares of cement companies have not reacted to the new developments in the last month or so, they are currently trading 15 to 20 per cent lower than their 52-week high.
Cement stocks have underperformed benchmark index Sensex in the last one month, with Birla Corporation, Kesoram and UltraTech posting negative returns, while stocks of ACC, Ambuja Cement, Grasim and India Cement have appreciated by 1-4 per cent.
A recent research by Lehman Brothers, which quoted cement dealers across the country, suggests that pricing has been very sluggish in the third quarter (October-December 2007) and there has been a fall in prices, especially in the South. Thus, they believe Q3 earnings should be weak due to the increase in the cost of coal prices.
The cement pricing scenario is also benign and analysts do not expect a significant price increase in November or December. In fact, there have been reports of prices falling in some regions.
Cement prices have been sluggish in this quarter across the country though demand growth continues to be strong with annual domestic demand growing by 10.6 per cent for April-October 2007. According to Lehman Brothers, the sluggish pricing is due to the commissioning of some capacities and also the onset of the monsoon in some parts of south India.
A cement analyst found that cement prices were weak in Karnataka and Andhra Pradesh, while being more or less stable in Tamil Nadu. The slowdown in infrastructure and irrigation projects coupled with the revival of some mini cement plants has created a surplus in the region. Retail prices have also corrected by around 3-5 per cent. That apart, cement companies in south India are facing cost pressures primarily due to high coal prices.
During the second quarter ended September 2007, the profitability of cement firms was subdued on account of higher power and fuel costs, despite the firm cement prices in that quarter. ACC’s operating margin for a tonne of cement sold fell to Rs 946.3 from over Rs 1,000 per tonne in the preceding three quarters. The margins for Ambuja Cement were lower at Rs 1,130.9 compared with Rs 1,214.5 in the fourth quarter and Rs 1,303.4 in the third quarter of 2006-07. The only company get on the upside was India Cements.