Cement companies hike prices in southern region; cut production to maintain demand-supply level
Moneylife Digital Team 13 September 2010

Post monsoon, while cement off-take is likely to pick up, the pressure on cement realisation caused by new capacity will restrict revenue growth, across all regions

Cement companies from the southern region, including India Cements, Madras Cements, Dalmia Cement and Chettinad Cement have hiked prices by Rs25 to Rs40 per bag of 50kg from 7th September, taking the average price in this region to Rs195 per bag.

At the same time, to maintain the demand-supply level, these companies are also believed to have cut down production.

Citing cement dealers from the southern region, Sharekhan Ltd in a note said that the price hike of Rs25 per bag is mainly due to cartelisation by regional players as they were incurring cash losses in some clusters. However, dealers are of the view that a price hike of Rs25 per bag is unlikely to sustain, the brokerage said.

Separately, according to media reports, the Competition Commission of India (CCI) is set to investigate the increase in cement prices by manufacturers and is looking at whether a cartel is at work in determining the prices. CCI is of the view that that cement prices have been increased over the past few years without any corresponding increase in either input costs or state levies, indicating that a cartel is at work.

Commenting on the CCI probe reports, Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a note said, "We believe that the increase in cement prices over the years has been because of the demand-supply scenario and increase in input prices. However, with such a probe in progress, we believe that the recent move by the southern cement companies to increase cement prices by Rs30-Rs40 per bag will have to be rolled back either in totality or in a significant way. This we believe will be negative for cement companies."

Despite the hike, average cement prices in the southern region are still low compared with the western, northern, central and eastern regions as well as the national average price of Rs225 per bag.

Although cement prices have remained under pressure over the past few months due to oversupply and fall in demand, it is the southern region, especially Andhra Pradesh, where cement producers have taken the biggest hit.

In FY10, cement prices in the southern region - especially in Hyderabad and surrounding areas - declined by about 15% to Rs145 per bag.

"Such a sharp fall in prices in the south has been on account of lacklustre regional demand due to slowdown in government as well as private infrastructure projects in the region and seasonal weakness in the construction activity due to the monsoon," Sharekhan said.

"However, from the bottom price of Rs145 per bag, at which companies were incurring cash losses in some clusters, we have factored in a hike in the prices and expect average realisation of south-based cement companies for FY11 to be in the range of Rs155-Rs160 per bag, which is lower than the present price of Rs170," the brokerage added.

During the period from 1st April to 9th September, the Moneylife Cement Index fell 5% to 693.3 points from 726.2 points while the Bombay Stock Exchange (BSE) benchmark Sensex rose 6% to 18,799.7 points.

While demand for cement had fallen in the southern region, the same in the central and western regions has remained strong, backed by scaling-up of rural and government spending on infrastructure. Especially in the central region, there has been limited capacity addition even as demand has remained robust. During April-May, while overall capacity utilisation of the sector remained at 82%, the same in the central region was reported at 102%.

During August, cement prices witnessed downward pressure and declined by Rs5-Rs10 per bag across all major cities like Kolkata, Delhi, Chennai, Baroda, Bengaluru and Hyderabad except Mumbai and other cities of Maharashtra on a month on month (m-o-m) basis. The decline in the cement price during the month was on account of poor cement off-take as construction activity slowed due to heavy rains.

However, in the mid-month period, a few cities in Maharashtra like Mumbai and Pune witnessed an increase in prices by Rs10 per bag.

Macquarie Research, in a note said, "In the near term, this oversupply is putting pressure on prices, and we believe that this will persist for the next 12-18 months. Inventories have risen due to heavy monsoons this year but we believe that demand will come back in the market as the monsoon season ends."

Sharekhan expects the cement demand to improve after the monsoon due to a likely pick-up in  construction activity and better utilisation of capacity. "The pressure on cement realisation due to stabilisation of the new capacity will restrict revenue growth. Moreover, the cost pressure in terms of higher power and fuel cost due to increase in coal and pet coke price and increase in freight cost due to an increase in lead distance will contract the operating margins of cement companies in the coming couple of quarters," the brokerage added.

A better-than-expected monsoon season as well as an increased focus on infrastructure building may push demand above the long-term average of 8%-9%. Given India's significant requirements, investment in infrastructure is likely to remain at elevated levels. About $1.2 billion is still on the table to be spent on infrastructure in the 11th and 12th Plans. This could drive growth in cement demand and keep it above the long-term average of 8%-9%, Macquarie said.

kuldeep prajapati
1 decade ago
take the price
vasu deva murthy
1 decade ago
please give me tha details of production of cement in andhra pradesh
Sibi John
1 decade ago
The prices will further rise and will touch the Rs.300 mark again.
Free Helpline
Legal Credit