Cement: Oct recovery not holding up in Nov; JPMorgan

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India Hard Hat
Oct recovery not holding up in Nov; North seeing sharp pricing pressure as companies try to protect market share


• Industry Oct growth stands at 17.3% y/y and 14% m/m: Industry growth
stood at 17% y/y, lower than the initial 25% y/y reported by the majors in the
beginning of the month, which were pre-dominantly North and West
companies, as South dispatch growth remains lackluster. We believe a
combination of floods in Sept and the festivals in Nov led to the spurt in Oct.
The strong Oct has taken YTD dispatch growth to 7%, nearer our full-year
estimate of 7.1% y/y growth. As of now, Nov seems to be a weak month, with
the expected demand in recovery post the festivals not having materialized
as of now (unseasonal rains have not helped). More importantly, we are
seeing: a) increasing pressure in the North India cement market as the new
capacity commissioning in the state of Rajasthan has coincided with
weaker demand; and b) cement prices in the North market are seeing a
downward correction. Government spending, which tends to pick up in H2,
has so far not seen any material pick-up. Given that private infrastructure
projects and road spending remain below estimates, we believe a pick-up in
Public Works (PWD) spending is critical for the Dec-March period. Our recent
meetings with cement companies and dealers indicated that companies in
North/West India are keen to protect market share and hence the pricing pressure
seen recently.


• Company-wise details - JPA (NR), SRCM (NR) see sharp m/m increase:
JPA (NR) reported its highest ever monthly sales at 1.3MT (+26% m/m), while
SRCM also reported a strong recovery at a 25% m/m increase. Most of the South
India-based companies reported <10% m/m volume increase.

• Where did the spurt in demand come from? Analyzing the reported state wise
cement consumption data (excluding ACC and ACEM), essentially 4 states
accounted for the m/m spurt with UP (24% of inc demand, 13% of India cons),
Gujarat (22% of inc demand, 8% of India cons), Maharashtra (12% of inc
demand, 11% of India cons), and Haryana (11% of inc demand, 5% of India
cons).

• South prices remain at a significant premium to the North, while capacity
utilizations remain low: Oct-10 saw very sharp increases in cement prices in
South India and so far they are holding with the ‘supply discipline’ being seen.
Demand has not improved but capacity utilization in the South, in our
estimation, stood at ~65% in Oct-10, the lowest level so far this year. South
India cement prices in our estimation are at a significant premium to North/West
prices (15-25%), which we continue to see as an anomaly. All India reported
clinker inventories have declined 17% from peak levels of 8.3MT reached in
Aug-10 and are now down to 6.9MT in Oct-10. All India cement capacity
increased ~4MT as per our calculations to 275MT. YTD capacity addition
stands at ~19MT so far, and we expect further capacity addition of ~25MT over
the next four to five months.

• Dec quarter shaping up to be interesting, given very strong cement prices in
the South, weakness in the North and West: Cement prices have held up very
well in South India, while North India prices have been weak, suggesting a
reversal of Sept results. However, the recent sharp rally in spot thermal coal
prices, in our view, points to continued elevated cost pressures across the sector.