Cement:: Clinker inventories remain at elevated levels- JPMorgan

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India Hard Hat
Clinker inventories remain at elevated levels, while
South prices now among the highest



• How much price increases took place in Sept and where? We believe exit
cement prices (prices as of the last week of Sept) were higher by 30-45% in
different parts of South India (implying price increases of Rs60-80/bag). We
understand further price increases also took place in the beginning of October,
though recently there seems to be some pushback. On the other hand, prices
were broadly flat to slightly lower in most parts of India in Sept. At current
retail prices, South India prices are actually higher than many of the West
and Northern markets, an anomaly which in our view is unlikely to sustain.
• While headline Sept-10 dispatch growth stood at ~7%, it comes on a low
base: YTD cement dispatch growth stands at 5.3% and to achieve our reduced
estimates of 7.1%, dispatch growth for the Oct-March period needs to be ~9%.
Given the sharply elevated base of last year’s Dec-March period, this is a tall
task, in our view. Post festival demand revival remains the key to watch. While
we expect demand from Government projects to pick up from here (government
spending tends to be more skewed in H2), we believe demand from the private
sector (infrastructure + housing) also needs to pick.
• Cement production and dispatches: Reported cement production in South
India was down 4% m/m, compared to a 1% m/m decline pan India. Cement
dispatches were down 5% in South, compared to 1% decline pan India (These
are reported numbers and do not include ACC and Ambuja). Cumulative
industry capacity stood at ~272MT as per our calculations.
• No material decline in clinker inventories: We are surprised by the clinker
inventory data, which shows a 6% decline in clinker inventories in Sept, with
clinker inventories (this does not include ACC and ACEM data) still at
significantly elevated levels of 7.82MT. Clinker production though declined
10% m/m and at 9.4MT was the lowest level over the last one year.
• Can these large price increases sustain in South India? We believe for the
price increases to sustain in South India, we need to see very strong ‘supply
discipline’ in the regions. At current retail prices, media reports (Steelguru) have
indicated some talks of importing cement from Pakistan by consumers. While
the logistics issues have not gone away (which impeded large imports from
Pakistan over the last 2 years), we believe recent large price increases are likely
to push consumers to look at alternative supply routes like either importing
cement from Pakistan or even bringing cement from the neighboring states like
Maharashtra, where prices are now lower compared to most parts of South India.
While we do not see any material supply of cement from these sources, in our
view, even token amounts, could likely push prices down. We continue to
believe the industry would need to give back some of the recent price increases
in South India. Our recent dealer checks have indicated some push back.
• Results- As bad as expected- Cost pressures unlikely to go away any time
soon: Results reported so far have highlighted massive margin pressure driven
by lower volumes and prices, while costs have remained high. While volumes
and prices should recover, costs are likely to remain elevated.