According to estimates, demand for cement is likely to go up by 10%, while production may soar by 12%—analysts expect the demand-supply mismatch to touch 107.70 million tonnes

Cement producers may face a tough time in the next fiscal due to soaring input costs and a surplus in supply, amid weak demand.

"We expect additional cement capacities of around 70 million tonnes (MT) to come on stream in the next financial year. However, demand growth has been lagging," according to CRISIL, a ratings & research agency.

"Demand spiked by only 4%-5% during the nine months ended December 2010, as compared with around 10%-11% during the same period of the previous year," added the agency.

Industry experts say that due to the imbalance in the demand-supply situation, prices of cement are likely to remain subdued over the long term.

Currently, prices of cement are around Rs270 per bag for 'A' grade cement players-and around Rs265 per bag for lower grade manufacturers.

"Demand is likely to grow by 10%, while (the) production rate would be 12%. Until there is considerable demand from the construction and infrastructure sectors, demand will be behind production, and that may create pressure on cement companies," an analyst from a research firm told Moneylife, preferring anonymity.

According to Fitch, a rating agency, the country's demand-supply mismatch may go up to 107.70MT in FY2011-12.

A weak performance of the construction sector during the third quarter depressed demand for cement. The prolonged monsoon put many construction projects on hold, while the execution of a few projects were badly impacted due to delays in acquiring land and obtaining approvals and clearances.

The Reserve Bank of India's move to increase interest rates is also slowing down fresh projects in the market.

However, experts also feel that prices will remain firm until the seasonal demand peaks till April.

"Prices will not come down until April, as there is seasonal demand. The government has set its target to spend money by the end of March; so historically, there is always a peak period till April," Ravi Sodah, an analyst with Elara Securities (India) Private Limited, told Moneylife.  

The country' second largest cement producer ACC reported a 31% drop in consolidated profit to Rs10.78 billion in 2010 because of falling selling prices and high input & power costs. Consolidated sales came down by 2.6% to Rs82.60 billion.

Ambuja Cements' net profit inched up by 4% to Rs12.60 billion in 2010 from Rs12.20 billion in 2009. Net sales grew by 4% to Rs73.90 billion.

India largest cement producer, UltraTech Cement, saw its net profit plunge by 36% in the October-December quarter.  

CRISIL has also said that as capacity additions will exceed incremental demand, operating rates are expected to remain below 80% over the next few quarters, resulting in reduced flexibility to raise prices. It will also impair the ability of producers to pass on input costs to customers. This has been a rising trend.

However, Mr Sodah added, "Prices will depend on how cement players are able to manage the surplus. The southern part of the country holds higher surplus. But cement producers across India have been able to maintain some kind of production discipline."

"Prices should come under pressure in this situation, according to fundamentals, but due to better production discipline, cement producers are managing to hold prices. In case this discipline is broken, then we will see a large fall in prices," added Mr Sodah.

However, soaring input costs and weak demand might dent the margins of cement producers.

ACC has said in a recent press release, "The company sees that demand for cement is likely to grow in the coming year at 9%-10%. However, some bottlenecks faced by the industry such as regular supply of major inputs like coal, slag, power and rail transport are likely to continue. We also expect that the pressure on selling prices will be maintained in the near term."