The cement industry is gasping for higher revenues. The industry, which has already been reeling under price pressures with most of the major players focusing on volume growth, is facing the challenge of rising costs, thus making a case for hiking prices. But many analysts are of the view that the industry has to wait till the unseason – rainy season – is over, even if they want to do so.
Cement prices have remained range bound in the past four years. They are mainly driven by regional capacity, utilization levels and demand within the region. Pricing scenario in FY18 was soft as all-India average realisation did not witness any improvement. Meanwhile, CARE Ratings in its annual review pegged the cement price hover in the range of 5 per cent either way from Rs 317/50 kg bag post GST over FY19 (2018-19), indicating that the price is unlikely to spike from the present standpoint.
"Prices are expected to remain range bound and may fall further with addition of new capacity especially in the Southern region. We expect the all-India prices to remain in the range of Rs. 317 (+/- 5% per bag post GST) during the year," said Madan Sabnavis, Chief Economist, CARE Ratings, in his long term forecast in the report released early May 2018.
On the other hand, input prices rose, particularly petcoke and diesel prices, besides logistics costs. A persistent spike in petcoke and diesel prices remains a major headwind for the industry. "Having surged by ~22-25 per cent in FY18, petcoke prices continued to move northwards till date in FY19. Industry’s power and fuel cost and freight cost together surged by ~Rs200-300/tonne in last one year. We believe cement industry is unlikely to witness any meaningful reduction in fuel prices in FY19E. Hence, realisation improvement is the prime way to support profitability," says Binod Kumar Modi – Senior Analyst – Reliance Securities, in response to a query.
Region-wise, CARE Ratings sees, Western and Eastern regions with favourable demand continue to record higher price for cement. These regions are driven by demand from infrastructure, housing and commercial real estate.
However, Sabnavis says, "Southern region with the highest installed cement capacity in the country (approx. 158MnMT) continued to witness lowest cement prices." Overall capacity utilization in the Southern region has been in the range of 55-57% post-2014. The same could be attributed to lower than expected growth in demand from housing and infrastructure development in the region. Additionally, eastern region witnessed considerable capacity addition, making it self-sufficient, which was previously met by supply from the southern region. The prices in Southern region are expected to remain subdued over the next 12-18 months. The prices would strengthen once capacity utilization moves above 60%.
Coming to the short-term trends, Vivek Maheshwari, Investment Analyst from the leading investment house CLSA, says, "Channel checks indicate that market share remains a focus for players and has impacted cement prices in most regions, with the exception of a few states. As a result, the price hikes of April and May have largely been reversed, with prices back to March levels in several markets."
In April 2018, rising demand resulted in an increase in cement prices in the Ahmedabad and Hyderabad markets by Rs 20/bag and Rs 10/bag respectively in April 2018 on an M-o-M basis. However, rising supplies resulted in prices remaining range-bound in the Kolkata market.
"There are pockets where the industry is trying to raise prices but dealer feedback is that a ‘real’ hike may only be visible post-monsoon," Maheshwari adds. Thus, margin-accretive cement pricing is still eluding this core industry.