Steep rise in prices over four months’ span have tapered off demand. Further price hikes face challenges like delayed monsoon and allegations of cartelisation of cement manufacturers.

The all India cement prices have eased in June 2019 in line with the expectations of the cement industry value chain last month based on some pressure points developing against the steep rise in prices seen since March 2019. Channel checks suggested that all-India cement prices have declined by 2 per cent month-on-month (m-o-m) to Rs 361/bag in June 2019 versus Rs 368/bag in May, in the first half of the month, though the fall has moderated by month-end.

The fall in prices was predicted by analysts taking cue from falling demand due to higher prices and dealers offering discounts to push their products. With sharp 8 per cent Month-on-Month (MoM or compared to the previous month) hike pan-India in April, average trade prices in April-June were up by 11 per cent Quarter-on-Quarter (QoQ).

The ET Cement Index that tracks cement price movements across the country was down by 1.39 per cent to 2397.3 points by end-June 2019 from 2431.1 points in end-May 2019, ending the four months of rising streak. With the government announcing that it will probe into builders’ allegations of cartelisation of cement manufacturers resulting price rise, the scope price hikes by cement manufacturers has been capped in the months to come. Irregular monsoon is also threatening to affect cement demand, particularly in rural areas where incomes of people are linked to agriculture production.

After six strong quarters of growth in demand for cement, a proxy for construction activity in the economy, it is set to see a sharp drop of 500 basis points (bps) to 3-5 per cent in the first quarter of this financial year, against a 9-10 per cent rise in the January-March quarter of 2018-19, according to rating agency Crisil, based on a survey of 250 dealers and others stakeholders across cement value chain.

The sentiment score at the pan-India level for the next two quarters fell to 5.5 from the previous quarter’s 6.0, Crisil said. The survey measures the outlook on construction growth over the next two rolling quarters on a scale of 1 to 10, where 1 indicates a major decline and 10 indicates a robust rise (on a year-on-year or YoY basis).

Demand downturn
Crisil attributed the sudden downturn in demand to a slowdown in construction activity ahead of the general elections, labour shortage and delayed release of funds by the government. The report also found that a Rs 50-60 per bag increase in the price of cement in the January-March quarter weighed on housing demand as well. "There is a ray of hope as experts expect an upturn in demand from the third quarter, that is, post monsoon," rating agency ICRA said in a report. In April 2019, cement production at 28.7 million MT is lower by 13.3 per cent on an MoM basis. "ICRA expects cement demand growth to taper in FY2020 to around 7 per cent from a double digit growth of 13 per cent in the previous year. The demand has been tepid in Q1 FY2020 (April-June 2019 quarter) due to slowing of project execution on account of general elections (usually resulting in labour unavailability). In Q2 FY2020, the consumption is expected to be on lower side owing to the monsoon season. Hence, ICRA expects the demand to pick up in Q3 FY2020 (October-December 2019 quarter)," said Sabyasachi Majumdar, Senior Vice President & Group Head, Corporate Ratings, ICRA.

Industry volumes increased by one per cent YoY to 28.7 MT in April 2019 after registering 12 per cent YoY growth in 4QFY19 and 13 per cent YoY growth in FY2019, according to the data released by the Department of Industrial Policy and Promotion (DIPP) of the Centre. The strong growth in FY2019 was led by the government’s housing schemes and infrastructure demand, it added.

Cartelisation allegations
Recently, the government has stated in parliament that the Competition Commission of India (CCI) is examining complaints regarding hike in cement prices and cartelisation by companies. This initiative was taken up based on complaints from property and infrastructure builders and contractors, particularly those involved in building roads and highways.

The housing and real estate sector is the largest consumer of cement, accounting for about 65 per cent of the total consumption, followed by public infrastructure at 20 per cent and industrial development at 15 per cent.

Delay in monsoon
The progress of south-west monsoon in June 2019 (from 1 June 2019 to 26 June’19) has been slow with 31 meteorological sub-divisions out of 36 recording deficient or scanty rainfall, which has been the highest in the previous six years. During this period, there has been a significant deviation of 36 per cent from the normal rainfall. The rainfall so far has been scanty over central and western regions, according to Indian Meteorological Department data.

The live storage level in the 91 reservoirs across the country as on June 27, 2019 was 26 BCM, recording a contraction of (-) 11.7 per cent than the corresponding period previous year. The current live storage level of the reservoirs at 16.2 per cent of the full storage level, is lower than the 10-year average live storage, which is 19 per cent.

"A slow progress in monsoon, along with storage levels of reservoirs remaining below the 10 year average during June 2019, could affect the sowing patterns and in turn the crop production in the country.

The monsoon patterns need to be closely monitored going ahead as it has an important bearing on food price inflation and the contribution of agriculture to the overall economy," said CARE Ratings in its recent report. Rural economy’s prospects are linked to monsoon, which is the main source of increasing agricultural production. When rural incomes rise it will impact cement demand positively, along with demand for other commodities. As the monsoon season extends till September every year, one has to wait for the temporal and spatial spread of monsoon to arrive at a conclusion on agriculture productivity during the fiscal.

– BS SRINIVASALU REDDY