Cement Makers Can’t Wish Away Concerns Despite A Surprise Price Hike

Cement makers continue to grapple with a supply glut and higher costs even as the government's spending on infrastructure is helping the economy revive from the twin blows of note ban and goods and services tax.

Cement stocks have fallen by at least 11 percent so far this year and hit fresh 52-week lows in the past week. They have since recovered some of the losses after a surprise hike in cement prices in the usually lean monsoon month of June in some parts of the country. Yet, the concerns remain.

Excess Capacity

A supply glut could be one of the reasons, according to a report by ratings agency CRISIL.

The agency said that while pan-India cement production capacity is around 450 million tonnes, domestic consumption stands at 293 million tonnes. This led to a near-50 percent surplus, it said, adding that average utilisation levels have been around 65-70 percent in the current fiscal.

Cement companies are estimated to add 65 million tonnes in capacity over the next two-three years, according to a report by the brokerage firm Investec. South and east India will together account for 61 percent of the capacity addition as companies fight to retain market share in the regions, the report said.

Rising Energy Costs

An increase in the prices of diesel, pet coke and coal has led to higher energy expenses for cement makers. Fuel and freight costs account for nearly 50-60 percent of the operating expenses of cement companies as 60-65 percent of cement freight is by road. The rally in Brent crude led to diesel becoming dearer by nearly 20 percent year-on-year in the quarter ended March.

Prices of pet coke — used by cement companies as feedstock — rose by 34 percent year-on-year in May. In addition, Coal India increased coal prices by around 17 percent in January 2018.

Volatile Prices

All-India cement prices, which rose by Rs 5 in April and remained steady in May, declined Rs 3 to Rs 328 per bag in June.

A Surprise Hike

Cement prices were increased in parts of India, according to at least two brokerages. Citi said that cement makers hiked prices in north and central India after cutting prices in early June. Morgan Stanley, in a report, said a price hike of Rs 5-15 per bag is in the offing. “It's a positive surprise as the Street was factoring a further price drop in monsoon,” it said.

“Prices of cement have risen by 5-12 percent in the last couple of weeks in north and central India. Prices in the south, east and west have largely been flattish in the same period. In the first quarter of the next fiscal, prices are expected to be lower in the south, but flattish to higher in the other regions,” said Raashi Chopra, director (India Research) at Citi.

Market expert Sanjay Ladiwala, of the Cement Stockists And Dealers' Association, confirmed the price hike in north and central India.

Lean Season

That reprieve may be short-lived as monsoon is usually a weak period for construction, hurting demand for cement. The summer rains have reached central India about 10 days later than expected, according to India Meteorological Department. It's expected to cover the rest of the country by first week of July.