We recently met one of the largest cement dealer associations of India to get an update on the cement industry.
As known, the cement industry has posted a robust volume growth in the last three months (November2008-January 2009) on account of a pick-up in governmental projects and personal house building activity in the semi-urban and rural areas.
The momentum may continue till the General Elections as the existing government wants to complete its ongoing infrastructure projects.
However, post-election the pace of infrastructure activity is likely to slow down which will bring down the volume growth of the cement industry.
Realty sector slowdown
The real estate sector (accounts for about 55% of the total cement consumption in the country) continues to suffer from inadequate demand. Hence, the cement industry cannot grow in the longer run if this sector doesn’t revive.
The real estate sector is one of the most adversely affected due to the recent slowdown in the overall economy.
Given the fact that property price cuts announced by builders and the softening home loan interest rates have failed to revive the demand for housing, the sustainability of the current volume growth in cement is uncertain.
After a long time almost all the cement players have made a cartel to grab the short-term benefit of a revival in the demand.
In the first week of February 2009, cement makers announced a price hike of Rs5 per bag across the nation. In the southern region, the prices have remained unchanged on a month-on-month (m-o-m) basis whereas the eastern region has witnessed the highest price hike of Rs8 per bag.
The latest cement price in both Chennai and Mumbai is Rs255, which is the highest among the other major cities. On the other hand, in cities like Delhi, Kolkata and Hyderabad the same is Rs229, Rs233 and Rs222 respectively.
On the back of the anticipated cement demand from the government’s infrastructure projects, the cement dealers are of the view that the current price may remain unchanged till April or May 2009.
However, after election the prices are likely to soften at least to the extent of the recent hike announced (Rs5 to 6 per bag).
As a measure against possible payment default the cement makers have tightened the credit norms.
Business from the trade segment has now started taking place at delivery on cash system whereas in the non-trade segment the credit period has reduced to 15 days from 30 days earlier.
Though the macro head winds remain, in terms of the slowdown in the urban real estate sector and the overall slowdown in the economy, the recent revival in the volume growth over the past three months has created positive sentiment for the sector.
Moreover, the recent price hike (Rs5 per bag) announced by cement companies coupled with the moderation on the cost front in terms of softened crude oil, coal and packaging prices might lead to positive surprises on the margin front.
However, we still believe that by FY2010 cement realization will see a downward trend on the back of the urban real estate sector, which continues to suffer from inadequate demand and upcoming capacity (54MMT by FY2010).
In such a situation we prefer Shree Cement and UltraTech Cement due to the relatively early commissioning of their capacities and their investment in captive power plants.