Cement companies that have been able to sustain prices in the past few months through production discipline and “cartelisation” may not be able to keep them firm as slack season kicks in and input costs rise.
“Oversupply is likely to keep cement prices under pressure. Cement companies would attempt to maintain price stability through supply discipline. However, such arrangements have not sustained for long in a market fragmented by various players with differential cost structures. Consequently, prices are expected to remain volatile for 18 months at least, which would impact earnings,” analysts Novonil Guha and Gurpreet Kaur of Brics Securities wrote in a research note on Tuesday.
Certain pockets in the northern market have already witnessed a price correction in the range of Rs5 to Rs13 per bag this month.
Also, cement companies would see the full effect of hike in coal prices in the April-June quarter.
Coal India, the largest coal supplier in the country, recently hiked prices 30%. “This is expected to be negative for cement firms which are dependent on linkage coal. Coal costs (for use in both kiln and captive power plants) are expected to go up by Rs5 per cement bag,” a research note from brokerage Alchemy said.
For companies dependent on imported coal, international prices have also been on a constant rise since November 2010 mainly due to floods in Australia. Prices have moved from around $85 per tonne in October 2010 to more than $115 in March 2011.
Most analysts believe it would be challenging for cement companies to hike prices in this scenario.
“I expect the price correction to start from mid-May as lot of construction work would start winding up by then with monsoon setting in. In addition, there are no issues on the capacity side—capacity and wagons for transportation are available,” said an industry official.
“Our study of historical price trends suggests that the seasonal factor will likely allow for the current strength in prices to sustain and peak by June, followed by a period of softening in the monsoon. The current price rise follows a period of high volatility, especially in South India, and hence raises questions on the sustenance of the price trend in the absence of improved volume growth and correspondingly widening demand-supply gap,” a Kotak Securities research note on April 13 said.
“Cement prices have started showing certain level of correction already. Further, I don’t expect that any ‘cartel’ would be sustainable,” said an analyst.
Margins for cement companies are already under pressure, owing to increase in input costs. Both ACC and Ambuja reported a fall in net profits for the latest March quarter.
Net profit for Ambuja Cements fell 11.8% from Rs462 crore in the March quarter of fiscal 2010 to Rs407 crore in the last quarter. Similarly, ACC’s consolidated net profit fell 10% to Rs350.17 crore in March quarter of fiscal 2011 from Rs392.8 crore in the year-ago
period.
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