Cement prices likely to harden on rising demand

Cement prices likely to harden on rising demand
Published: 01 January 2007

Indian cement prices are on the rise due to a tight demand-supply mismatch despite massive investments going into capacity build-up by companies. Prices in Mumbai have risen by Rs5-10 to Rs235-240 per 50 kg bag and are expected to go up further by Rs15-20 to Rs260 per bag, said analysts.

"Riding the economic boom, the demand for cement will go up by 10 per cent per annum for the next three years. Cement prices will remain high as realisations of capacity additions will be felt only in the last quarter of the financial year 2008," said Mr Manish Balwani, analyst with Emkay Shares and Stock Broking.

Buoyed by current demand, many cement companies are planning major expansions. Two leading cement companies — ACC and Gujarat Ambuja Cement — alone are investing over Rs 3000 crore in setting up greenfield plants and ramping up capacities. The AV Birla group companies Grasim Industries and Ultra Tech Cement will be investing close to Rs 3900 crore in capacity additions. Demand for the commodity during the fourth quarter of the financial year 2007 is seen at around 44Mt against a supply of 42Mt.

"Cement prices have risen sharply on an average by nearly 19 per cent to Rs 195 per 50 kg bag during the first half of calendar 2006 against the same period last year. We expect prices on an average to increase further by about Rs 20-25 per bag driven by tight demand-supply up to June 2007 with utilisation levels crossing 94 per cent," said an Edelweiss Research report.

The report says average earnings before interest, tax, depreciation and amortisation (EBITDA) of the five leading cement companies will go up by Rs193 per tonne to Rs1186 by April-June 2007 from the level of Rs993 per tonne in the first quarter of FY07.

Government purchases, which constitute around 10-15 per cent of the total demand, are at a concession of 5 per cent. North leads demand Between April and November 2006, northern India saw demand rising by 13 per cent, the South by 11 per cent, the West by 8 per cent and the East by 6 per cent. In financial year 2008, northern India is expecting a demand of 50Mt against a total capacity of 46Mt while in the South the capacity will be at 56Mt against a demand of 47Mt. The West will have excess capacity at 51Mt  against the demand of 40Mt, while in the East, the demand will be 28Mt against a capacity of 26Mt.

"The truck overloading ban in early 2006 led to an average freight cost incidence of about Rs 8-9 per bag. However, in financial year 2008, no such cost triggers are expected. The prices are to be driven completely by the demand from northern and southern India. Interestingly most of the capacity additions are being planned in the southern zone," said an Edelweiss analyst. "The rising prices are unlikely to dampen demand as there is no substitute for cement.”