Cement: prices see sharp recovery in western India, but sustainability is key
Cement prices in western India have recovered from the lows they touched a year ago. In June, the price of a cement bag weighing 50kg stood at Rs335, 16% higher than Rs290/bag in the same month a year ago, showed a recent dealer channel check report by Kotak Institutional Equities. On a month-on-month basis, prices in this region improved by Rs2/bag in June.
The recovery in prices however has been driven largely by Gujarat. Cement prices in the state increased by as much as Rs20-30/bag month-on-month. Currently, in cities like Surat and Vadodara, cement prices stand at all-time highs of Rs320/bag and Rs310/bag, respectively, added the report.
In some parts of Gujarat, cement prices fell to a decade-low in the initial months of the calendar year, hit by demonetisation, analysts said, attributing the improvement in prices mainly to increased government spending on infrastructure and related activities.
Cement demand in Maharashtra was marred by drought in the previous year; though some improvement in demand has been witnessed there, cement prices remain more or less flat, they added.
On a year-on-year basis, the western region has seen the highest improvement in prices among all regions.
“Most players here were not able to make profits at the previously prevailing prices, so in the current round of increases, western India saw a larger price increase compared to other regions—partly playing catch-up as well as (something) attributable to improved demand,” said Murtuza Arsiwalla, an analyst at Kotak Institutional Equities.
Meanwhile, cement prices in northern and central India corrected in June after remaining high at the start of the quarter. As the chart shows, price decreases were strongest in the south and on an all-India basis too, cement prices corrected by Rs6/bag month-on-month in June.
Weakness in prices in most regions signals that a significant revival in cement demand is yet to happen. Also, unlike the eastern and central regions, where capacity addition has a bearing on prices, for the west that factor doesn’t have a role to play. The west has not seen significant capacity additions in the immediate past because cement makers can cater to demand in this market from their plants located in both north and south India.
According to analysts, in the last three fiscal years, the western region has seen relatively lower capacity additions of about 8-9 million tonnes.
So, is this recovery sustainable? “Historically, it has been seen that cement prices rise pre-monsoon and then once the lean period sets in, they correct. One cannot be sure whether this price improvement will sustain.” said Prateek Kumar, an analyst at Antique Stock Broking Ltd.
Apart from the onset of the monsoon, a near-term negative impact on cement volumes and thus on prices, is anticipated due to destocking of inventory ahead of the goods and services tax implementation.