Pricing power of cement might be curtailed

Pricing power of cement might be curtailed
Published: 15 August 2007

According to local reports, the Indian Government will allow state run MMTC to import cement without a BIS certification. This pricing debate has spilled over onto local TV stations with one recent interview with a local analyst summarised below:

Q: What are the advantages of allowing cheaper imports

A: During monsoon we do not see prices of cement going up but this time it has happened and there has been tug of war going on between the cement manufacturer and the government because prices have kept rising. So to curb on the domestic price rise of cement this move has been initiated that the canalise agency MMTC has been permitted to import and I think if that happens one can have the import made from the neighbouring countries like Korea and Pakistan where the landed cost of the cement would be cheaper by at least Rs 30-35 per bag.    

Q: The impact that it could have going further because we are expecting further capacity addition from domestic cement companies by the end of this year and definitely in FY09. What kind of an impact would it have on the corporate?

A: If I take a call in the short-run because though the 50 million tonne of capacity addition is in the pipeline but I do not think that anything would be operational on or before December because Shree Cements probably are the first to implement and then in phases things will start from January 2008 or maybe even from April 2008 the capacity additions would start kicking in. The present capacity of about 150 million is definitely not sufficient and that’s the reason that prices have been continuously going up.

So whatever the pricing power the cement companies will have would get curbed with these import norms now being allowed to the MMTC. But post 2008 i.e. from April 2008, in the normal course because of the capacity addition pricing power of the cement companies would go away and even we could see softening of cement prices by the manufacturer to the extent of Rs 15-20 per bag.

Q: Highlight how this would impact many companies, you talked about Shree Cements but the big players Gujarat Ambuja, ACC, Grasim Industries? who would face the greatest brunt because obviously companies which are going to be lined up near the coastal areas as well as areas where these imports would get landed would have an higher impact than the companies which are centrally located?

A: I do not think that the coastal located companies would get more affected but if you see the overall scenario there had two points before them for the last couple of years they have been controlling their cost of production predominantly reduction in the energy consumption which has come down to about 70-75 units per tonne and I do not think that below those levels one can bring any efficiency so the operational efficiency has already come in and the leader in that segment has been Gujarat Ambuja. I do not think they have more room for improving their operational efficiency.

The second was the pricing power; they have been continuously raising prices so hereon maybe after March 2008 they will not be having the advantages in both the fronts; they will not be bringing any efficiencies hereafter plus the pricing power will also be going away. But if this import happens by MMTC maybe from September post monsoon because during monsoon we do not have infrastructure available at our importing ports by MMTC. So maybe from October pricing power would be squeezed on part of the cement manufacturer.