Cement prices head southward on poor demand and oversupply

Cement prices head southward on poor demand and oversupply
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First Published: Wed, Nov 11 2009. 09 25 PM IST

Updated: Wed, Nov 11 2009. 09 25 PM IST
The fall in cement prices, which started in August, is gaining momentum in southern India. Despite strategies to counter this, the two southern cement companies—Madras Cements Ltd (MCL) and India Cements Ltd (ICL)—will take a hit in revenue realizations and profitability during the next two quarters.
Due to poor demand and oversupply, cement prices fell by nearly Rs15-23 per bag in the south in the last fortnight. Hyderabad has been the worst hit, where prices fell by 15%. According to a dealer who declined to be named, cement in Andhra Pradesh is now around Rs135 a bag and around Rs160 in Tamil Nadu and Karnataka. On the whole, cement prices in the south are down 40-42% from peak levels in April. That’s compared with a drop of around 20% in the northern and western parts of the country.
The political instability in Andhra Pradesh since September, low infrastructure spending in Karnataka and Kerala and the onset of retreating monsoons in Tamil Nadu are the factors expected to keep demand in the south muted for the next six months. Even in the first half of the current fiscal that began in April, demand in the south grew by only 4.1% year-on-year, compared with 12.6% all over India.
With capacity expansion coming on stream in the next 12 months, capacity addition in the region could be around 15 million tonnes (mt) each in the current fiscal and the next, whereas additional despatches are estimated at only around 7mt each for the two years.
“Cement inventory levels have shot up from 15 days six months back to about two months now,” an analyst said on condition of anonymity. Dealers anticipate an additional 5-8% drop in prices till December. A report by financial services firm India Infoline Ltd says, “We estimate Ebitda (earnings before interest, taxes, depreciation and amortization) loss for selling price below Rs120 per bag, given that cost of production is Rs85, freight Rs7, excise duty Rs11.5, state VAT (value-added tax) Rs13 and dealer commissions and other sundry expenses are Rs3.” Ebitda is a key indicator of a company’s profitability.
Against this backdrop, both ICL and MCL are striving to shore up margins through other strategies.
MCL’s long-term strategy to set up 80MW of coal-based power plants will make it self-reliant in power by fiscal 2011. It is also among the lowest-cost producers of cement. Also, it will be able to sell its entire wind power to the grid, enabling it to earn substantial additional revenues by 2010-11.
ICL is looking for coal mines in Indonesia to ensure a stable supply. Besides, to address power concerns in terms of supply and pricing during boom periods, it plans to set up two 50MW power plants. It plans to enter the northern markets through its new factory in Rajasthan and another planned in Himachal Pradesh.
MCL has low-cost inventory of petroleum coke—a key ingredient in cement manufacture—at $40 (Rs1,864 now) per tonne (prices have moved above $65 a tonne), which will help ease pressure on margins in the December quarter.
But while the long-term strategies could improve the profitability of both ICL and MCL after the fiscal to March 2011, revenues could drop by 8-12% for the December quarter sequentially. Besides, large capacities from firms such as Bharathi Cement Corp. Ltd and Sree Jayajothi Cements Ltd will come on stream during fiscal 2011. Any short-term recovery in either revenues or profits is, therefore, ruled out.
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First Published: Wed, Nov 11 2009. 09 25 PM IST