North Indian cement units might suffer due to a spill-over effect

Cement producers in north India expect demand to improve despite fall in prices while analysts believe demand will be unable to meet the oversupply in the market

Cement manufacturers from northern India are confident that there would be continuous demand following projects related with the Commonwealth Games, infrastructure and housing and the rates will go up. However, analysts feel that a spill-over additional supply from other regions may leave North India’s cement producers disappointed.

Cement prices in north India have already fallen by Rs10 to Rs15 per bag in the past month. Following the end of the monsoon, cement manufacturers are expecting increase in demand. Next year, there would be the Commonwealth Games in New Delhi which needs newer stadiums, bigger roads, hotels and other infrastructure. This will also boost the demand for cement. While agreeing with the demand scenario, analysts are sceptical about possible price increase.

“We expect cement consumption growth in India to remain strong, with the thrust on infrastructure and strong demand from rural housing. However, huge capacities that are expected to come on stream in the second half of FY10 are expected to exert pressure on the cement prices. We expect these additional capacities to fully ramp up over the next three-four months and eventually exert pressure on cement prices,” said Angel Broking Ltd in a report.

According to an Edelweiss Consumer report, cement prices were down in Lucknow by Rs80 to Rs100 per bag from peak prices of Rs325 per bag. In Kanpur too, prices are down by Rs10 to Rs15 per bag and further pressure is expected. Currently, only the National Capital Region has been unaffected by a fall in cement prices as there is a strong demand. This strong demand however, is matched by supply, the report said.

"Even if the demand for the region may go up, there will be a pinch on the prices due to supply. In the north the prices have fallen by Rs10 to Rs15 per bag in the past one month. It may be delayed by two to three months, but this is going to be there. Now the expectation is that demand will improve after the end of monsoon and the holiday season. They expect more demand from the Commonwealth Games also. This is what is likely to drive the demand for cement. There is also a bounce back of Rs5 per bag," said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.

A further fall in cement prices in north India is likely to be witnessed in the next three to six months due to a spill-over effect from other regions of India. This is likely to be evident in the fourth quarter of 2010.

Emkay Global Financial Services Ltd in a report said, “We agree that given the surplus cement scenario in FY10 and first half of FY11, cement prices are expected to remain under pressure. We also agree that given the negative news flow in the short-term, the sector is likely to underperform. However, we would like to reiterate our medium- to long-term positive view on the sector given that the declining consensus earnings already factor the softening cement price."
Mr Srivastava added, "Ultimately, when we look at the larger picture of the country, then we believe it is not only about the north Indian part, there will be a supply from other parts of India. There are certain supplies coming from the eastern part, the western part and other parts of India. Supply from the regions where demand is not so good, will be diverted to the Northern region. The northern region is already increasing capacity in lieu of higher demand. On a larger scale, we thus believe that prices will fall. This further fall in cement prices is likely to happen in the fourth quarter of 2010."

Though there have been bounce-backs in the prices by around Rs5, both in north India and south India, analysts believe it will not help in the long term.

"There has been a fall in prices in southern India; we thus expect a bounce of back of Rs5 to Rs10 per bag, though this will not last for a longer term," Mr Srivastava added.

Officials from Shree Cement Ltd, one of the key players in north India, were not immediately available for comment.
-Amritha Pillay [email protected]

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