Cement demand and prices are expected to remain under pressure in the near term, according to JPMorgan's August dealer channel checks, which indicate a slowdown across most regions. The brokerage said the weakness was broadly expected given seasonal trends, but risks are emerging around government capex and higher costs.
JPMorgan spoke to 10 dealers across the country. Most said that prices were stable, except for a few that flagged price cuts. According to the brokerage firm, dealers in the East reported price cuts in the Rs 5-15 per bag range with one dealer highlighting Rs 10-15 per bag cut for trade and Rs 10 per bag for non-trade.
Prices remained stable in the South and West, although one southern dealer said current prices were close to February-March levels.
Most of the dealers attributed the weakness to the monsoon, though some of them mentioned that the rains are just exacerbating the weakness in demand.
“Overall, this weakness in demand explains why companies are unable to take price hikes. A few dealers mentioned that they don't see the demand improving in the near-term, with some pinning the hopes of recovery to the post-festive period,” said JPMorgan.
JPMorgan expects weak demand to eventually weigh on pricing, with potential price cuts emerging in September, similar to last year. Volume recovery could begin from November, potentially supporting prices.
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The brokerage also flagged a risk to the strong momentum seen in the June quarter. Top 11 cement companies reported industry-wide volume growth of 9% YoY in Q1, supported potentially by higher government capex. Central and state government capex rose 23% and 6%, respectively, during the quarter. JPMorgan believes this pace may be difficult to sustain.
Higher costs expected by cement companies in Q2 could further pressure margins. However, relatively low market expectations and signs of improved pricing discipline in Q1 provide some downside protection to earnings estimates.
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