Cement cos regain pricing power as demand improves from infra, construction

An end to the seasonally weak quarter of July-September has brought good news for cement companies. For one, demand for cement is growing from sectors such as infrastructure and construction. This is therefore, improving utilisation levels at plants.

Two, while cost pressures are receding, there is still some concern they could inch up with crude and currency volatility being high.

Price hikes of around 6-8 per cent, observe companies, are likely between now and December in phases to protect margins and improve realisations.

“Demand has grown from sectors such as infrastructure and construction as the monsoon season has ended,” says Hari Mohan Bangur, chairman, Shree Cement, adding, “While petroleum coke (petcoke) prices have fallen for now, they could increase as the Russia-Ukraine war drags on. Crude and currency volatility also remain high.”

In recent analyst meets, UltraTech, Dalmia Bharat, and JK Cement have pointed to margin pressures in the second quarter (Q2) of the current financial year (2022-23, or FY23). The pressure is expected to ease from the third quarter onwards as price hikes kick in.

“For Q2FY23, the all-India average cement price was down 6.1 per cent quarter-on-quarter (QoQ). Prices in North and Central India are down 8.5-9 per cent QoQ. The same has fallen by 5.7 per cent in the East. Prices in the South and West are down 3-4 per cent QoQ,” wrote analysts at IIFL Securities in a report dated October 10. 

Analysts at brokerage firm Jefferies, on the other hand, note that the average cement price in the July-September period was down 5.5 per cent sequentially. This came amid weak offtake as the quarter did not see high cement despatches.

Bangur says utilisation levels at his plants have gone up to about 70 per cent now versus sub-50 per cent in the July-September period. These could go to about 80-85 per cent, he says, as the government’s capital expenditure push increases demand for cement in the months ahead.

According to a recent report by CRISIL, cement volume growth in FY23 is likely to be in the region of 8-10 per cent - the highest since 2018-19. Growth will be aided by infrastructure and construction sectors, prompting key players to seize scale opportunities through acquisitions, as well as look at organic growth.

While above the $90-per-barrel mark, Brent crude price remains tepid with fresh Covid restrictions in China and worries of global recession.

On Friday, the December contract of Brent crude on the Intercontinental Exchange closed at $91.63 per barrel, lower by 3.11 per cent from its previous close.

The rupee, meanwhile, has fallen nearly 10 per cent year-to-date against the dollar amid economic uncertainty. The price of petcoke, used in making cement, has corrected by 25-30 per cent in the last few months. But gains from the drop are likely to reflect with a lag, say sector experts.

Koustav Mazumdar, associate director, CRISIL Research, says, “Cement volume growth this financial year will be driven by non-housing segments, wherein offtake is expected to rise more than 15 per cent. Demand from the infrastructure segment will be aided by government spending, while industrial and commercial demand will be driven by growing investment in data centres and warehousing.”

CEMENTING THEIR PLACE

• Price hikes of about 6-8% expected in October-December period
• Driven by improvement in demand in user industries
• Companies also need to protect margins amid input cost pressures
• Plant utilisation levels also going up significantly for industry