Demand uptick to bring back pricing power soon
Demand uptick to bring back pricing power soon

Demand uptick to bring back pricing power soon

The drift in cement prices continued for one more month albeit marginal, in August 2018, despite cement leading the IIP growth in April-July 2018 with an impressive 14.7 per cent, taking the overall growth to 5.8 per cent. ET Cement Index eased 1.66 per cent in August 2018 to 1938.2 points from 1970.9, sliding from its peak of 2048 points seen in June 2018. This latest month's slide comes close on the heels of 3.77 per cent slide in the index in July 2018.

Though some analysts have predicted that the industry's pricing power to return in a material way in the April-June 2018 quarter itself, this has not become a reality despite rising costs. Cement majors have taken price hikes in Q1 (2 to 3 per cent), which was missing by mid-sized players which are likely to follow. So far the volume push has come from the non trade segment thus the price hikes were slightly muted. As and when demand comes from the trade segment, we believe all players will be able to take higher price hikes, says PhillipCapital India in a mid-August report. Costs increased by 6 per cent year-on-year YoY and 2 per cent quarter-on-quarter (QoQ). However, premium brand push by some industry majors helped realisation uptick in the quarter taking blended realisations moved up by 2 per cent QoQ. ACC took price hike to tune of 5 per cent, Ambuja with 3 per cent, UltraTech with 2 per cent and Dalmia with 3 per cent.

There is an expectation that higher infrastructure push, mainly from the government, driving growth in cement production, coupled with some modicum of restocking post-GST implementation. However, there is downside risk arising from the recent floods in Kerala, which are expected to hit demand for cement for a few months, though reconstruction activity in the state will eventually increase demand for cement in a few months time.

'Infra creation has a multiplier effect on housing/ IHB demand where cement price delta is highest. We see industry pricing power coming back driven by realignment of the non-trade to trade mix and 'premium brand' initiatives by various manufacturers,' said Vaibhav Agarwal of PhillipCapital India in a recent report.

The optimism of PhillipCapital India flows from rising volumes during the quarter and 'quite positive' volume guidance given by these companies while announcing their quarterly results. 'Structural concerns of absence of demand seem muted; we believe this will eventually result in better pricing power for the industry,' Agarwal said in his quarterly result review recently.

Cement demand in Kerala, which is estimated to contribute around 13 per cent to overall sales volumes in southern India, would get hit in the near term due to the recent floods. Consequently, prices in this region are expected to remain muted, says Kotak Institutional Equities Ltd. Its recent dealer channel check showed that prices of the building material in south India declined to Rs 345/bag in August from Rs 347/bag of 50 kg in July.

'Prices were flat in states of Tamil Nadu and Karnataka, while they declined in Kerala. We note that companies in the south reported weak demand from Kerala due to heavy rains and floods,' said the Kotak report.

BS Srinivasalu Reddy

Related Stories

No stories found.
Indian Cement Review
www.indiancementreview.com