Regaining pricing power to be a long grind for cement companies2 min read . Updated: 20 Mar 2019, 10:01 PM IST
- Inadequate demand growth to absorb excess capacity is weighing on cement prices, especially in the south
- As March approaches, cement companies are under year-end pressure to meet sales targets
The worst fears of investors in cement stocks have come true, with cement prices falling in March. Sharp cement price hikes in February raised hopes that the sector may have finally reclaimed its long-lost pricing discipline. Unfortunately, that is not the case.
Cement prices across India fell by ₹2/bag to ₹305 in March, showed a dealer channel check by Motilal Oswal Securities Ltd. One cement bag weighs 50kg.
Region-wise, South India experienced the maximum cut of around ₹15/bag to ₹314. In Hyderabad, Kerala and Bengaluru, the survey showed cement prices declined by as much as ₹20/bag against the backdrop of price hikes of ₹30-50/bag in the previous month being led by cement makers in the south. Prices marginally declined in the east and were mostly flat in other regions.
Plenty of factors influence this rollback in cement prices. First, inadequate demand growth to absorb excess capacity is weighing on prices, especially in the south. Second, as March approaches, cement firms are under year-end pressure to meet sales targets. So they tend to make up for volume growth at the expense of prices, say analysts.
Some of these regions are also facing labour shortage, while the liquidity crunch because of payment issues is still ongoing in various regions, Motilal Oswal said in a report on 15 March.
While all-India prices increased 3% sequentially in the March quarter, the recent fall notwithstanding, there’s little room for cement price hikes. Typically, given the busy construction season, the first half of the calendar year is a seasonally stronger period for cement producers. In anticipation of greater demand and utilization, cement companies hike prices.
Government spending on infrastructure has of late driven cement demand, given the lull in the housing sector. However, in the run-up to the elections, massive spending by the incumbent government on infrastructure and allied activities is unlikely. If demand doesn’t improve adequately, cement prices will remain subdued.
Cement prices are likely to be contained in the next 12 months, according to Bank of America Merrill Lynch.
Also read | The real reason for 28% GST on cement
Meanwhile, a sensitivity analysis by CLSA Ltd showed that pricing is critical for the profitability of cement companies and every 1% change in realization results in a 5-8% earnings per share change.
“Industry behaviour and discipline seem to be the key pricing drivers as there have been cases of pressure and stability, irrespective of demand, utilisation or the cost cycle. This makes price forecasting hard and, hence, volatility will remain high for cement," it said in a note on 18 March.
In short, for cement prices to hold, demand and capacity need to significantly improve. For now, the outlook on the sector’s realizations growth has turned dimmer.