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Cement prices: weak demand puts pressure

Weak demand continues to ail the cement sector. The trend is quite contrary to the normal, where demand moves up after the monsoon, as construction activity, deferred during the rains, picks up. This time, though, cement prices have declined across most parts of the country, except in Andhra Pradesh and Telangana. In these two states, government activity in infrastructure projects has helped shore up the price.

The steepest price decline in the three months ended 31 December has been in the north, where prices are down by about Rs.15-20 per bag (50kg). One reason is the surplus capacity built up in the recent past in Rajasthan. Prices have been dropping in the eastern and central regions too, although the fall is less severe. This has also pulled down all-India average cement prices by 2-5% per bag.

According to Reliance Securities Ltd, the absence of strong infrastructure activity and housing demand are the main reasons for the woes of the cement sector. Ironically, this is in spite of higher tendering activity in roads, water supply and irrigation projects in the last six months. The hope is it will take some time for this to trickle down into higher demand for cement and building material.

Another report by Karvy Stock Broking Ltd says that weakness in the rural economy, which contributes to nearly 40% of the country’s cement offtake, is also a deterrent to higher cement demand. Even housing demand is tepid in rural areas, according to cement dealers.

In the final analysis, the all-India capacity utilization of cement companies is around 70% compared with 85-90% during years of robust demand. Along with rising freight and power costs, this leaves no scope for improvement in profitability. The short-term outlook, therefore, doesn’t seem bright at all.

The markets, of course, have appropriately punished cement stocks. They have underperformed the BSE Sensex in the last six months, after hopes of improving infrastructure activity did not translate into higher cement demand. However, the two south-based firms India Cements Ltd and Ramco Cements Ltd have posted higher returns.

Source: Live Mint