Prices continuing to spike, steeply at times, for the last four months is highlighting the pricing power of the industry, but their sustainability at these levels is being doubted.

Cement prices are spiralling up continuing their rising streak in May 2019, that had a nascent beginning in February 2019, though some pressure points are visible in certain regions later in May 2019.

The ET Cement Index that tracks cement price movements across the country was up by 5.83 per cent to 2431.1 points in end- May 2019 from 2297.2 at the beginning of May 2019, close on the heels of supernormal rise of 13.07 per cent seen in April. The price momentum upwards continued to firm up since February 2019, setting a clear tone for the prices.

Sharp pricing recovery since February 2019 has already aided cement companies to report healthier operational performance in the quarter ended March 2019, as well as in ensuing quarters, say analysts.

After the underperformance in 2018, cement stocks are up 10-30 per cent year to date (YTD/May 29, 2019) (vs +10 per cent for Nifty) led by cement pricing rebound; factors such as strong demand, stable government and lower inputs are also helping. 4QFY19 (January-March quarter of 2018-19) was the sixth consecutive quarter of double-digit volume growth. While realisations missed forecasts, lower costs helped,’ says Vivek Maheshwari, Investment Analyst of the leading broking firm CLSA. The readings are limited to the group of stocks that CLSA is tracking in its portfolio.

"With exit prices higher, 1QFY20 seems like a blockbuster, but our checks suggest higher discounts in the last two weeks due to weak construction activity. With elections behind, a clear picture should now emerge," Maheshwari added.

Volume growth momentum stayed strong and for the sixth-quarter in a row remained in double digits at 11 per cent in 4QFY19, while for the full-year volume growth too was in double digits. Despite a high volume base, industry feedback on volume growth stayed positive led by government’s focus on infrastructure along with affordable housing, says CLSA.

Sabyasachi Majumdar, Senior Vice President, ICRA has predicted that the domestic cement demand is likely to grow by eight per cent during the current fiscal. The demand push will result in the capacity utilisation rising to 71 per cent from 65 per cent in FY18 (2017-18), ICRA said in a report. It also predicted that the growth in demand will be driven by a likely 18-20 million tonnes per annum (MTPA) of additional production capacity during the fiscal.

Though the cement prices have made a big leap matching the decadal levels achieved before 2010, it may not match in terms of capacity utilisation which was in the range of 85-90 per cent a decade ago, mainly because of huge supplies available at the current juncture.

The cement demand has been improving across the country and as a result cement prices have been heading north. Cement production was higher by around 13 per cent year-on-year (YoY) in FY19, up from 6 per cent YoY growth in FY18. "The double-digit growth rate is likely to get moderated in FY20 to 7-8 per cent," ICRA said.

The recent elections have disrupted construction activity on the ground due to factors like lack of workers and tight liquidity, resulting in higher discounts and rebates offered by channels and players in a bid to clear inventory. "Now that the election is over, we believe a clear trend will emerge on demand as well as pricing as the activity starts to pick-up again," says CLSA.

Markets-wise, Delhi and Bengaluru saw muted demand in May 2019, resulting in easing of wholesale prices by Rs 4-5/bag of 50kg, while on the other hand, demand in Mumbai was good and as such there has been no recent decline in wholesale prices of the building material, according to cement dealers.

Cement prices were hiked twice in Delhi in April, resulting in a huge hike of Rs 60/bag. However, the prices have been on the rise since the beginning of April in Mumbai, with overall hike of Rs 30 in the month. The industry has also witnessed another benefit coming its way in Q4 for stocks in the coverage of CLSA ? Unit costs have declined 4 per cent quarter-on-quarter (QoQ) and stayed flat year-on-year (YoY) at aggregate level, showering benefits even in energy costs. The Q4 exit cement prices were higher than quarter average, signalling a strong 1QFY20, CLSA added.

– Markets-wise, Delhi and Bengaluru saw muted demand in May 2019, resulting in easing of wholesale prices by Rs 4-5/bag of 50kg, while on the other hand, demand in Mumbai was good.

– ICRA said that the industry will also benefit from easing of freight expenses, owing to the increase in the truck axle load norms from Q2, which will result in relatively higher operating profitability for cement companies in the near-term.

Many analysts are predicting that incremental demand will come from the proposed "housing for all" scheme and construction activities of Metro/irrigation projects, besides other infrastructure projects.

"The continued focus on the housing sector and rural economy in the Union Budget for 2019-20 is likely to have a positive impact on the cement industry. On the infrastructure side, the continued thrust on the roads and railways is likely to push cement demand. While the healthy demand is likely to support the recent price increase, the supply side pressure on prices in some regions cannot be ruled out completely," Majumdar of ICRA said.

Though there is every reason to believe that demand would be outpacing supply in the months to come, some stakeholders are keeping their fingers crossed over the sustainability of prices at such high levels, particularly citing a price hike of Rs 30-50/bag in a single month – in April 2019, which they claim is unusual.