As competition increases, the chase for volumes will weigh on prices
11th june 2018
Volume growth for many cement manufacturers in the March quarter was largely aided by ramp-up of capacities.
Better pricing scenario in the East and Central markets offset the impact of weaker pricing in the North and South India, helping companies to see sequential improvement in realisations.
But there was no respite on the costs front. Elevated prices of key input material petroleum coke (petcoke) and higher diesel prices pushed power & fuel and logistics expenses higher for many cement makers.
Companies mitigated the impact of raw material pressure via better operating leverage and other cost-efficiency measures. That, along with increased realisations resulted in sequential improvement in operating margins.
Despite March being a busy construction season, the sector’s demand growth was not strong enough to support higher prices.
Yes, cement prices are slowly catching up on an all-India basis. They increased by Rs5/bag month-on-month in May to Rs331/bag, on the back of Rs4 increase in April, showed a recent dealer check by Kotak Institutional Equities. One cement bag weighs 50kg.
But this revival may be short-lived. That’s not only because June is a seasonally weak quarter for the sector and cement prices usually correct in this span, but with increasing competitive intensity, the fall in prices may be sharper this time.
Pan-India focused cement companies UltraTech Cement and Shree Cement have been adding capacity by over 20% via organic and inorganic routes especially in the north region.
UltraTech Cement Ltd is ramping-up assets acquired from Jaiprakash Associates Ltd. The utilization level of these cement units picked up from 51% in the December quarter to around 75% in the three months ended March, the company’s management said in a post- earnings conference call.
Recently, the company acquired cement assets of Century Textile Ltd, further strengthening its presence in the eastern (Chhattisgarh), central (Madhya Pradesh) and western (Maharashtra) regions.
Rival Shree Cement Ltd commissioned a grinding unit with a capacity of 3.6 million tonnes per annum (mtpa) in Sri Ganganagar in Rajasthan during the March quarter.
Some other examples include mid-cap cement producer JKCement Ltd setting up 2 mtpa grinding unit in Mangrol and Nimbahera in Rajasthan by fiscal year 2020.
Also, once a decision on Binani Cement Ltd’s acquisition is reached, ramp-up of its assets would have a bearing on cement prices in the Rajasthan region.
Not just the North, South-based companies too are following the suit.
The Ramco Cements Ltd plans to increase existing grinding capacity at Vizag, Andhra Pradesh and Kolaghat, West Bengal by 1.1mt each over the next 12-15 months. It also plans to set up a new grinding unit at Odisha with a capacity of 0.9mt.
Sagar Cements Ltd and KCP Ltd would also be adding capacities in the Southern region in the next 18 months.
OCL India Ltd has announced a capacity addition in the East. There is no major capacity addition expected in Central India since the region already has many new entrants trying to gain a foothold there.
In short, in a scenario of unimpressive demand growth, cut-throat competition, and input costs pressure, volume growth for cement companies is likely to come at the expense of prices.