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Business News/ Market / Mark-to-market/  Why are cement prices falling in a seasonally strong quarter?
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Why are cement prices falling in a seasonally strong quarter?

One big reason why cement prices are falling is relatively low demand

The plunge in overall cement prices indicates that cement producers are chasing market share gains at the expense of prices, despite persistently elevated input costs. Graphic: Naveen Kumar Saini/MintPremium
The plunge in overall cement prices indicates that cement producers are chasing market share gains at the expense of prices, despite persistently elevated input costs. Graphic: Naveen Kumar Saini/Mint

The March quarter is a seasonally strong one for cement companies, given the busy construction season. However, this time it is different.

A recent dealer channel check by Kotak Institutional Equities showed that all-India cement prices fell by Rs9/bag from February to Rs322/bag in March—offsetting increases of previous months. A cement bag weighs 50kg.

The decline was led by the southern region where prices fell the most—Rs17/bag compared to a month ago, in spite of the easing in the sand mining ban issue, said the report dated 9 March.

This was followed by northern, western and central markets that saw prices falling to the tune of Rs5-9/bag on a month-on-month basis. Price movement in eastern region was flat, added the report.

One big reason is relatively low demand. Demand from government spending on infrastructure and allied projects has not been sufficient to support prices.

Real estate activity, especially from the housing segment, which is the largest contributor to overall cement demand, remains dismal.

Another reason is increased competitive intensity mainly on the back of capacity ramp-ups, diversification into newer markets by regional cement makers and some brownfield expansions.

For instance, volumes in the markets of central, north and south are largely being driven by aggressive ramp-up of Jaiprakash Associates Ltd’s capacities acquired by UltraTech Cement Ltd.

The plunge in overall cement prices indicates that cement producers are chasing market share gains at the expense of prices, despite persistently elevated input costs.

And while ACC Ltd and Ambuja Cements Ltd have put their merger on hold, they have entered into a “master supply agreement" with each other and their focus on further market share gains would keep them from leading a pricing action, says analysts.

Also, it is yet to be seen what kind of impact the ramp-up of Binani Cement Ltd will have on the sector’s pricing scenario once a final decision on its acquisition is reached.

According to analysts, historically, barring the demonetization year, there has been a trend of pricing discipline among cement companies, which has not played out this time due to the above-mentioned factors.

Depressed cement prices and high costs will surely weigh on the companies’ profitability in the March quarter earnings. Cement producers having exposure to the southern market are likely to be worst hit compared to regional and pan-India firms.

On the other hand, volume growth of cement producers would be better in the March quarter given the lingering low base-effect of demonetization.

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Published: 15 Mar 2018, 07:57 AM IST
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