Cement prices: Up but not away
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Cement prices in northern India have reversed after staying down for long. Dealers say producers hiked prices suddenly by Rs.10-15/bag of 50 kg in February and another Rs.50-70/bag in early March. With average cement prices in February at Rs.267/bag, that’s a substantial increase in March.
This does not appear to be an isolated instance but is not yet a widespread trend. The price increase in the north does appear to have spread to the nearby central region. But the western Indian market is subdued and in the southern parts, prices have retraced a bit after ruling strong for over a year. As for the eastern market, where prices are normally firm, it faced challenges.
Binod Modi, an analyst at Reliance Securities, wrote in a report that cement prices in the north had slid to unviable levels since September, which was reflected in the weak December quarter performance. A bounce was waiting to happen. North-based companies are also following the price discipline displayed by their southern counterparts. Lower production has led to a tighter market. In addition, there has been a slow but sustained increase in demand due to government spending on infrastructure and low-cost housing.
Meanwhile, dealers hope that higher budgetary support in fiscal year 2017 for infrastructure and housing will have a multiplier effect on cement demand. That may still not be enough to solve the problem of oversupply. Analysts at India Ratings and Research Pvt. Ltd said in a Webinar that cement capacity is likely to grow at a compound annual growth rate of 4.9% in the fiscal years between 2015 and 2017. They watered down demand growth in fiscal year 2016 from the earlier 6.5-8% to 3%.
If profit margins are expected to remain stable even then, it is because of lower freight and energy costs.
From an investor’s standpoint, the sector is more stable now than in the past two-three years. But most of these positives are factored into valuations of large companies such as UltraTech Cement Ltd, Ambuja Cements Ltd and Ramco Cements Ltd. Besides, input prices have been subdued for long. Any reversal in commodity prices can put pressure on profitability.
A big jump in demand can put to rest concerns that investors may have on cement stocks. For now, that is nowhere in sight.
The writer does not own shares in the above-mentioned companies.