Cement sector cracks on weak demand

Fall in cement prices and sales volumes towards the end of February could temper growth estimates for the March quarter. Numbers trickling in from cement firms show demand contraction in February from a year ago. Pan-India cement company UltraTech Cement Ltd registered a 4.5% decline in dispatches, even as JK Lakshmi Cement Ltd and Shree Cement Ltd reported a 5% and 16% drop, respectively.

add_main_imageAnalysts and industry offer several reasons—untimely rains in February in some regions like the north, the two-day nationwide strike and the Maha Kumbh festival that affected labour availability. A Religare Capital Markets Ltd report says that the industry as a whole could register a 6-7% drop in sales volumes in February and a high-base effect during the next two to three months could moderate growth rates, too.

In fact, the drop in volume was a negative surprise after a 4-5% uptick in January sales. Of course, if one were to draw cues, the Eight Core Industries data from the ministry of commerce showed volatile production growth rates over the last three to four months. In fact, January registered a 6.6% contraction in production. Did this signal the ensuing slowdown in sales and weakening demand, as seen in February?

Meanwhile, the softening of cement prices validates poor demand. Barring the eastern region, where cement prices rule high due to shortage of wagons and timely transportation, the prices have come off from the high levels seen for almost 12-18 months. In other words, price hikes taken by the cement firms to pass on an increase in freight costs in the recent past have not been sustained. Even in the relatively stable southern region, dealer feedback points to weakness in Andhra Pradesh and Karnataka.

Some dealers believe that cement prices have gradually eased after the order by Competition Commission of India’s order last year, which levied a huge penalty on firms that were allegedly maintaining lower production and supply to keep prices aloft.

According to Ajay Srinivasan, head of research, Crisil Research “cement prices are likely to stay flat in the near term due to lack of strong demand drivers like higher execution in realty sector (although residential bookings have been improving) and infrastructure spend.” Crisil estimates a 4-5% demand expansion for fiscal 2013, assuming that the month of March normally clocks strong volumes as companies push stocks. Of course, this would be lower than the 6% reported in fiscal 2012, but one cannot expect a higher growth rate given that the GDP growth itself is pegged at around 5% for the current year.

Cues for a rise in the prices of cement stocks will now hinge on demand between April and June, the pre-monsoon period, when construction activity is robust.