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Cos hold up prices by controlling output Excess capacity may keep prices under check
S lowdown in the economy has not prevented the cement industry from keeping prices firm, but huge capacity addition expected in the coming two years may test the sector’s resilience amid price and margin pressures.
The beginning of the current financial year was marked by low cement off-take in India. As the year progressed, cement consumption, as re-flected by despatches of companies, improved. While despatches in the first half of the financial year rose a moderate 3.6% compared with a year ago, consumption rose sharply post monsoon. Cement despatches rose 10.6% in October-December, resulting in a growth of 5.9% in the nine months ended December.
On a sequential basis, there was an improvement in despatches in each of the three quarters of 2011-12 (April-March).
While October-December growth looks good, it must be noted that low base of the previous year played a significant role in boosting the numbers. Volumes had recorded a year-on-year decline in No-vember and December of 2010, resulting in growth in October-December 2011 looking robust.
Other reasons for improvement in despatches include:
Moderate revival of demand in regions other than the south
Year-end volume push by cement majors
Re-stocking by dealers on expectations of rise in demand from this month
Demand for cement is also seasonal in nature. Usually, monsoon is the slack period for the cement industry as construction activity slows down.
Demand in the current financial year slowed in April-December as major demand drivers grew at a moderate pace. Key demand driv-ers in the cement sector include:
Housing sector: It accounts for a large portion of domestic demand. Rise in urbanisation, an increasing number of house-holds and higher employment are primarily driving demand for housing. However, uncertainty about future incomes, rising interest rates and firm real estate prices have restrained conver-sion of latent demand into actual purchases. This has led to weakness in fresh investments in housing.
Infrastructure development: Emphasis of the government on development of dedicated freight corridors, upgrading and building of greenfield airport projects and ports were expected to drive consumption. But this has not happened because of slow pace of execution of infrastructure projects.
Industrial projects: Slowdown in the economy, policy uncertainty, high interest rates and weak global economic outlook have resulted in companies holding back their capital expenditure plans.
Commercial construction: Construction of retail outlets, office space, hotels, malls, hospitals and schools grows as the economy develops. Demand for consumer-centric sec-tors — such as, automobiles, consumer durables and fast-moving consumer goods — have been impacted due to high inflation, high interest rates and uncertainty in in-comes. This has led to fall in demand for retail space and malls. Rising costs are also affecting the hotel industry, thereby resulting in hotel expansion slowing down.
Surplus Capacity, Output Under Check
C ement industry’s capacity stood at 228.4 million tonnes as of March 2011, according to Cement Manufacturers’ Associa-tion data. Output was 209.8 million tonnes, which put capacity utilisation at 74.4%.
With rise in capacity in the current financial year, utilisation is estimated to have fallen. Utilisation fell also because a production discipline is being maintained amid slowing demand growth to prevent fall in prices.
Despite the current surplus capacity, India’s cement making ca-pacity is estimated to go up from 300 million tonnes currently to 479 million tonnes by March 2017, according to the final report of the Working Group on roadmap for the sector in the 12th Five-year Plan (2012-17). This is based on the assumption that the economy will grow 9%.
According to the report, current annual capacity of the industry has touched 300 million tonnes, the second-largest globally after China. With another 179 million tonnes being added until 2017 implies a compounded annual growth of 9.8%. It also forecasts demand growing 10-11.75%.
It might be pertinent to highlight here that cement demand growth forecast, based on 9% GDP growth seems very difficult to achieve. As per the latest (January) Fitch report on cement: “GDP growth had an average multiplier of 1.3x on cement demand dur-ing FY09 and FY10. This multiplier fell to 0.4x last year (FY11) due to tighter monetary measures adopted by Reserve Bank of India”. In the current year also, cement despatches fell in April-September compared with over 7% GDP growth.
Several projects are due for completion by 2014. Data sourced from company announcements and captured by Centre for Moni-toring Indian Economy show nearly 70 million tonnes capacity is estimated to come on stream. This will exert further supply pres-sure on prices or will result in lower utilisation rates if demand
Clinging On To High Prices
C ement prices continued their upward journey in October-December. After the price fall during the monsoon season, cement compa-nies raised prices by `7-12 per 50-kilogram bag in September, depend-ing on the region. Thereafter, prices in most cities have either increased or remained unchanged at high levels.
In addition to demand-supply dynamics, rising input costs also played a role in cement price rise. In fact, the increase in cement prices in the current financial year was mainly because of in-creased costs being passed on the end-consumer.
Prices of cement in the previous financial year, 2010-11, dipped on account of weak demand and a substantial increase in capacity. This year, companies maintained a production discipline and have managed to keep price fall under control.
Companies raised prices gradually, thereby passing on the increas-ing cost burden (cost details discussed in the next section).
A look at the region-wise prices indicates a double-digit, year-on-year increase in most cities across the country in December. On a month-on-month basis, prices inched up in Mumbai and Kolkata. Despite maximum capacity addition in the southern states, compa-nies managed to hold up prices by controlling production.
Recently, cement companies — including ACC Ltd, Ambuja Ce-ment and JP Associates Ltd — agreed to cut prices by Rs 25 per 50-kg bag in Himachal Pradesh from January 5, 2012.
The Himachal government, in a meeting with cement majors, per-suading them to cut prices in the state as cement in Himachal Pradesh is costlier by Rs 50-75 a bag compared with neighbouring states of Punjab and Haryana. This is despite cement plants being located in the state and enjoying several incentives and benefits.
There were protests against high cement prices even in Chhattis-garh. According to a report in Business Standard newspaper, hun-dreds of people led by Tilda legislator Devji Patel protested at the Century Cement plant in Baikunth. They blockaded entry points of the plant and stopped workers from entering the unit. The protest-ers also blocked the transport of cement bags out of the factory.
While Himachal Pradesh and Chhattisgarh account for a small portion of total domestic consumption, there is a fear that such protests may be followed in other areas as well, thereby affecting bargaining power of suppliers.
Cost Pressures Remain
A fter recording year-on-year fall in profitability in 2010-11 (April-March), cement companies have slowly passed on higher costs to consumers. Operating costs, mainly coal, power and fuel and freight, registered a sharp rise in the current year. Companies chose to raise prices on expectation of higher demand and protected margins. They also despatched less cement (by maintaining a production discipline) to keep prices firm.
Cement industry either uses imported coal or buys it from Coal India Ltd, India’s largest coal producer. While international coal prices softened in October-December, its impact was negated by the Indian rupee depreciating. Domestically, coal prices were 30-40% lower from prevailing international prices. However, Coal India changed its pricing mechanism from UHV (useful heat value) to GCV (gross calorific value) (refer Infocus dated Nov 23). Coal India raised linkage coal prices (Grades D-F) by 50-90%.
While analysts expect Coal India’s price rise to result in cement industry fuel costs increasing `3-5 per 50-kg bag, cement compa-nies peg the fuel cost increase at around `8-10 a bag. Three large cement manufacturers — ACC, Ambuja and UltraTech Cement — source 60%, 40% and 33% of their coal requirements, respec-tively, from Coal India. Southern cement manufacturers source coal from Singareni Coal. While Singareni has not yet announced a change in pricing method, analysts expect it to happen soon.
Cement is transported either through railways or roadways. Freight cost accounts for 25-30% of total cost. This cost segment has been rising because of recent rise in rail freight rates (6% in October) and a moderate increase in road freight rates.
Hence, higher input prices are exerting a pressure on costs which is detrimental for the industry because they may not be able to pass on entire increase in costs to the consumer.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cos hold up prices by controlling output Excess capacity may keep prices under check
S lowdown in the economy has not prevented the cement industry from keeping prices firm, but huge capacity addition expected in the coming two years may test the sector’s resilience amid price and margin pressures.
The beginning of the current financial year was marked by low cement off-take in India. As the year progressed, cement consumption, as re-flected by despatches of companies, improved. While despatches in the first half of the financial year rose a moderate 3.6% compared with a year ago, consumption rose sharply post monsoon. Cement despatches rose 10.6% in October-December, resulting in a growth of 5.9% in the nine months ended December.
On a sequential basis, there was an improvement in despatches in each of the three quarters of 2011-12 (April-March).
While October-December growth looks good, it must be noted that low base of the previous year played a significant role in boosting the numbers. Volumes had recorded a year-on-year decline in No-vember and December of 2010, resulting in growth in October-December 2011 looking robust.
Other reasons for improvement in despatches include:
Moderate revival of demand in regions other than the south
Year-end volume push by cement majors
Re-stocking by dealers on expectations of rise in demand from this month
Demand for cement is also seasonal in nature. Usually, monsoon is the slack period for the cement industry as construction activity slows down.
Demand in the current financial year slowed in April-December as major demand drivers grew at a moderate pace. Key demand driv-ers in the cement sector include:
Housing sector: It accounts for a large portion of domestic demand. Rise in urbanisation, an increasing number of house-holds and higher employment are primarily driving demand for housing. However, uncertainty about future incomes, rising interest rates and firm real estate prices have restrained conver-sion of latent demand into actual purchases. This has led to weakness in fresh investments in housing.
Infrastructure development: Emphasis of the government on development of dedicated freight corridors, upgrading and building of greenfield airport projects and ports were expected to drive consumption. But this has not happened because of slow pace of execution of infrastructure projects.
Industrial projects: Slowdown in the economy, policy uncertainty, high interest rates and weak global economic outlook have resulted in companies holding back their capital expenditure plans.
Commercial construction: Construction of retail outlets, office space, hotels, malls, hospitals and schools grows as the economy develops. Demand for consumer-centric sec-tors — such as, automobiles, consumer durables and fast-moving consumer goods — have been impacted due to high inflation, high interest rates and uncertainty in in-comes. This has led to fall in demand for retail space and malls. Rising costs are also affecting the hotel industry, thereby resulting in hotel expansion slowing down.
Surplus Capacity, Output Under Check
C ement industry’s capacity stood at 228.4 million tonnes as of March 2011, according to Cement Manufacturers’ Associa-tion data. Output was 209.8 million tonnes, which put capacity utilisation at 74.4%.
With rise in capacity in the current financial year, utilisation is estimated to have fallen. Utilisation fell also because a production discipline is being maintained amid slowing demand growth to prevent fall in prices.
Despite the current surplus capacity, India’s cement making ca-pacity is estimated to go up from 300 million tonnes currently to 479 million tonnes by March 2017, according to the final report of the Working Group on roadmap for the sector in the 12th Five-year Plan (2012-17). This is based on the assumption that the economy will grow 9%.
According to the report, current annual capacity of the industry has touched 300 million tonnes, the second-largest globally after China. With another 179 million tonnes being added until 2017 implies a compounded annual growth of 9.8%. It also forecasts demand growing 10-11.75%.
It might be pertinent to highlight here that cement demand growth forecast, based on 9% GDP growth seems very difficult to achieve. As per the latest (January) Fitch report on cement: “GDP growth had an average multiplier of 1.3x on cement demand dur-ing FY09 and FY10. This multiplier fell to 0.4x last year (FY11) due to tighter monetary measures adopted by Reserve Bank of India”. In the current year also, cement despatches fell in April-September compared with over 7% GDP growth.
Several projects are due for completion by 2014. Data sourced from company announcements and captured by Centre for Moni-toring Indian Economy show nearly 70 million tonnes capacity is estimated to come on stream. This will exert further supply pres-sure on prices or will result in lower utilisation rates if demand
Clinging On To High Prices
C ement prices continued their upward journey in October-December. After the price fall during the monsoon season, cement compa-nies raised prices by `7-12 per 50-kilogram bag in September, depend-ing on the region. Thereafter, prices in most cities have either increased or remained unchanged at high levels.
In addition to demand-supply dynamics, rising input costs also played a role in cement price rise. In fact, the increase in cement prices in the current financial year was mainly because of in-creased costs being passed on the end-consumer.
Prices of cement in the previous financial year, 2010-11, dipped on account of weak demand and a substantial increase in capacity. This year, companies maintained a production discipline and have managed to keep price fall under control.
Companies raised prices gradually, thereby passing on the increas-ing cost burden (cost details discussed in the next section).
A look at the region-wise prices indicates a double-digit, year-on-year increase in most cities across the country in December. On a month-on-month basis, prices inched up in Mumbai and Kolkata. Despite maximum capacity addition in the southern states, compa-nies managed to hold up prices by controlling production.
Recently, cement companies — including ACC Ltd, Ambuja Ce-ment and JP Associates Ltd — agreed to cut prices by Rs 25 per 50-kg bag in Himachal Pradesh from January 5, 2012.
The Himachal government, in a meeting with cement majors, per-suading them to cut prices in the state as cement in Himachal Pradesh is costlier by Rs 50-75 a bag compared with neighbouring states of Punjab and Haryana. This is despite cement plants being located in the state and enjoying several incentives and benefits.
There were protests against high cement prices even in Chhattis-garh. According to a report in Business Standard newspaper, hun-dreds of people led by Tilda legislator Devji Patel protested at the Century Cement plant in Baikunth. They blockaded entry points of the plant and stopped workers from entering the unit. The protest-ers also blocked the transport of cement bags out of the factory.
While Himachal Pradesh and Chhattisgarh account for a small portion of total domestic consumption, there is a fear that such protests may be followed in other areas as well, thereby affecting bargaining power of suppliers.
Cost Pressures Remain
A fter recording year-on-year fall in profitability in 2010-11 (April-March), cement companies have slowly passed on higher costs to consumers. Operating costs, mainly coal, power and fuel and freight, registered a sharp rise in the current year. Companies chose to raise prices on expectation of higher demand and protected margins. They also despatched less cement (by maintaining a production discipline) to keep prices firm.
Cement industry either uses imported coal or buys it from Coal India Ltd, India’s largest coal producer. While international coal prices softened in October-December, its impact was negated by the Indian rupee depreciating. Domestically, coal prices were 30-40% lower from prevailing international prices. However, Coal India changed its pricing mechanism from UHV (useful heat value) to GCV (gross calorific value) (refer Infocus dated Nov 23). Coal India raised linkage coal prices (Grades D-F) by 50-90%.
While analysts expect Coal India’s price rise to result in cement industry fuel costs increasing `3-5 per 50-kg bag, cement compa-nies peg the fuel cost increase at around `8-10 a bag. Three large cement manufacturers — ACC, Ambuja and UltraTech Cement — source 60%, 40% and 33% of their coal requirements, respec-tively, from Coal India. Southern cement manufacturers source coal from Singareni Coal. While Singareni has not yet announced a change in pricing method, analysts expect it to happen soon.
Cement is transported either through railways or roadways. Freight cost accounts for 25-30% of total cost. This cost segment has been rising because of recent rise in rail freight rates (6% in October) and a moderate increase in road freight rates.
Hence, higher input prices are exerting a pressure on costs which is detrimental for the industry because they may not be able to pass on entire increase in costs to the consumer.
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