Is the spurt in cement prices temporary, or is there a shift in sentiment from gloom to hope? Cement prices have headed northwards since January, quite contrary to forecasts of a drop. In early March, the price per bag of cement rose by Rs10-20 across the country. According to analysts, it is likely to move up further, amid some volatility.
Cement prices are now higher by Rs30-80 per bag, compared with three months ago. In Andhra Pradesh, the worst-hit market, prices have moved up from Rs130 to Rs180, while in Mumbai, Delhi and Bihar, prices have scaled Rs275, Rs306 and Rs310 per bag, respectively.
Demand has certainly improved. The Commonwealth Games in Delhi, pre-election government expenditure in Bihar, a pick-up in construction and industrial activity in the north and west have all translated to higher demand.
But the real triggers have been cost-push factors. Most companies passed on the hike in excise duty from 8% to 10% to consumers. And power costs are rising and there is a power shortage, too. An executive with a leading cement producer said that in southern Andhra Pradesh, there is no power for seven days a month, with unscheduled power cuts that disrupt cement supply. Of course, most large cement makers have captive power facilities. But shortage of coal and the higher cost of power produced through diesel generators increase costs.
Graphic: Yogesh Kumar/Mint
Further, shortage of wagons will hinder transport of coal and cement. “Freight hikes are camouflaged by changing the classification category in railways,” said the executive, who didn’t want to be identified. Transportation costs have risen from around 14% of sales to nearly 20% in some companies.
“Costs have increased but, correspondingly, realizations are also higher except in south India. They are higher in east and central India, and near parity in west and north India on an annual basis,” said Sameer Ranade, senior analyst with the Mumbai-based broking firm Asit C Mehta Investment Intermediates Ltd.
Stockists say that these factors, along with a temporary shortage in supply, could take up cement prices further. Meanwhile, cement supply is increasing, with new capacity additions. This might weaken prices during the next fiscal, especially in the south, where companies such as Madras Cements Ltd and India Cements Ltd may manage production and supply, but smaller firms could be hit.
The glimmer of hope, however, is that demand is growing at 11-12% per annum. Besides, recent consolidation will have its benefits, too. With the Ambuja-ACC combine and UltraTech-Grasim controlling nearly 40% of the market and the top five cement makers having a 56% share of the market, price erosion might be minimized.
As a report by Motilal Oswal Financial Services Ltd puts it, “A decline in average cement prices will be lower and operating margins (26% in 2010-11 vs 13% in 2002-03) will be higher than in the trough of the previous cycle.”
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