Over-supply in cement in FY10 could depress prices and squeeze margins by 2-5 per cent, estimate research analysts. The cement industry will add 40-45 million tonnes (MT) of capacity this financial year, increasing capacity by 21 per cent.
The industry had an installed capacity of 212 MT last financial year, while consumption was 176 MT. Already, 7 MT of supply has been added till April 2009; another 20 MT will get added this financial year.
“We expect cement prices to decline sharply from the third quarter of FY10, when the newly-commissioned cement plants stabilise,” said J Radhakrishnan, an analyst with brokerage firm India Infoline, in a recent note to investors.
Analysts expect prices to decline by Rs 5-20 per 50 kg bag, depending on the supply that is coming in. Cement makers hold a similar view. Ashish Guha, MD, Heidelberg Cement, expects prices to soften by Rs 10-15 a bag this year.
Thus, prices could fall 6 per cent from the average price of Rs 242 a bag in the country, which is line with the analyst expectations. “If prices come down 5 per cent, operating margins of cement companies could fall 200-500 basis points,” said Kamlesh Jain, a cement analyst with brokerage firm Prabhudas Lilladher.
A large number of new projects are in the pipeline, which is likely to add 40-45 MT of cement-making capacity in FY10. Some of these projects may have been deferred, but the bad news is that all this capacity will come by March 2010 as many of the projects are in advanced stage of completion.
Luckily, the capacities won’t come at one go but will be staggered over the year. Besides, it takes time to ramp up capacity and stabilise plants. Experts estimate that 25-30 million tonnes of additional supply will come into the market this year.
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Even then, there could be a surplus capacity of 6-8 MT. “There will be a supply overhang. When you compete on a quarter-on-quarter basis, the figure looks high,” said AL Kapur, MD, Ambuja Cements. This could further depress capacity utilisation, which had come down to 86 per cent last year.
Cement demand is growing at 7-8 per cent, it grows at 1.25 per cent of GDP growth rate. The downturn hurts cement less than other sectors as demand in rural areas made up for the fall in demand in urban areas. The industry produced 181 MT of cement, and consumed 176 MT last financial year.
Cement’s ride has not been without pain. “The industry was affected in the second half of calendar year 2008, when volumes fell 15 per cent while prices fell 5-10 per cent, with capacity utilisation falling to 85 per cent,” said Guha. Today, plants are again operating at 90 per cent capacity.
Demand typically falls during the rainy season. If there’s a spurt in private and government spending in the next few months aided by improved liquidity, it could create additional demand for cement. Or else, cement companies will have to live with lower capacity utilisations and lower margins this financial year.