Manufacturers kick off the season with a bang
Cement prices surged steeply over the last three months to touch a new peak. The ET Cement Index that tracks cement price movements across the country was up by 13.07 per cent to 2297.2 points in April 2019 from 2031.7 in March 2019. The price spiral movement that began in February on a feeble ground, has firmed up over the next two months, setting a clear rising trend.
In March, all-India cement prices averaged Rs 334/bag of 50kg. Still in April, cement companies continued to drive price increases in certain pockets. There are reports that cement prices were hiked in some metros by Rs 25-30/bag in April on the back of rising rural cement demand. For now, realizations for cement companies may rise by 2-3 per cent quarter-on-quarter, especially for south-exposed companies, say analysts.
Led by majors
With the pickup in rural demand for building material, cement prices have surged in Delhi and Mumbai by Rs 25-30 per bag. All the major brands including UltraTech and Ambuja Cements raised their prices in April. Dealers based in the national capital/Delhi region cited the pickup in rural demand as the main reason, as this is the harvesting season and also a time when people renovate their houses as wedding season takes off during this time.
According to a cement maker, April has always been a month when the prices are increased as it is the first month of the financial year and also deep into the construction season.
Cement demand has been quite impressive with double-digit growth in January, while it tapered off a bit in February led by substantial price hikes in select markets and higher inventory level at dealers' level. 'Though demand improved substantially on month-on-month (MoM) basis in March 2019, it was moderate on year-on-year (YoY) basis owing to higher base. As per our channel check, all regions barring Northern and Eastern regions witnessed sequential price hikes in the range of ~2-8 per cent mainly led by substantial price hikes in Southern and Western pockets,ö Reliance Securities said in a report.
The price hikes by cement companies particularly in South and West regions have also resulted in higher realisations for cement companies located in these geographies and boosted their profits too. These developments have increased interest of stock market investors in cement stocks in March and April.
Meanwhile, the management of cement major ACC is fairly optimistic on its cement demand outlook driven by rural areas on expectations of normal monsoon and government focus on infrastructure and housing for all.
Residential activity hit
However, the steep hike in cement prices since February 2019 has left even dealers in several locations surprised as the hike comes at a time when demand is weak and the housing segment which accounts for over 60 per cent of the consumption is witnessing slowdown. In several geographies, builders are raising hue and cry over the rising cement prices citing lack of demand for new projects and consequently lack of pricing power with them.
Calling it an artificial shortage created by cement producers in an effort to increase the demand in the state, a Goa based dealer said that the dealers were looking for some thrust to economic activity returning after the general elections to bringing in a semblance of stability to the pricing structure in cement. There is also an expectation that Goods and Services Tax (GST) as applicable to cement and other building materials will be rationalised after the elections.
Despite several measures taken by state governments, shortage of sand is still an issue in several locations, particularly in urban centres, hindering the progress of construction activity, particularly in housing.
A dealer, who wished not to be identified, has also complained that the manufacturers were resorting to direct sales to the customers offering lower price margins to dealers, which also resulted in lower sales for dealers and consequently squeeze their margin.
Cement prices touching Rs 325 - Rs 330 per bag as against Rs 260 per bag couple of months ago have also affected the ongoing work of affordable housing segment and infrastructure projects in Indore, according to builders' body, CREDAI. Cement accounts for about 10 per cent in total cost of construction in housing segment.
The construction activity in the capital region of Amaravati, which is one of the ambitious projects boosting cement demand, was also hit by skyrocketing cement prices and other building material prices. The realty market, which is facing sluggishness for the last four years, may not recover if the prices of cement and iron witness further rise, according to a local dealer.
Easing cost pressures
The glimmer of hope for cement companies' profitability is easing of cost pressures witnessed in the recent months. The trend in falling input costs is already visible in the results for quarter ending March 2019. Unit costs of Ambuja Cements declined one per cent quarter-on-quarter (QoQ) for the March quarter.
Imported petroleum coke (petcoke) prices declined by around 20 per cent from the recent peak in August 2018. Similarly, domestic petcoke and international coal prices have eased. As a result, power and fuel cost would soften by Rs 17.10 a tonne sequentially, says JM Financial Institutional Securities in a recent report. Year-on-year, savings for cement companies would be about Rs 54.50 per tonne, it added. However, the larger concern is whether the revival in cement prices will sustain in the months to come, with hopes pinned on the new government that will be formed at the Centre.
- BS SRINIVASALU REDDY