The additional capacity coming into the market could keep prices under pressure.
The managing director of ACC, Sumit Banerjee, believes demand for cement in 2009 is likely to grow at somewhere around 6-8 per cent. That ‘s possible though right now it seems a tad optimistic given that key consuming sectors such as construction aren’t seeing too much activity. It’s true that consumption in January this year was up 8.6 per cent (source:CMA) but that was more because of a low base in January 2008—consumption then had risen just one per cent.
Over the last five years, demand has been up by about 9 per cent in a booming economy. But until investment in the real estate space increases, it’s hard to believe there will be a pick up in volumes. Volumes for ACC in the december 2008 quarter were up nearly 9 per cent resulting in an increase in net sales of a reasonably good 12 per cent. However, higher input costs crimped operating margins by about 160 basis points to just under 22 per cent. Net profits were disappointing, driven mainly by other income, even though the company’s realisations for the quarter were up nearly three per cent.
With additional capacity coming into the market though, realisations could be under pressure. Over the last five years, around 33 million tonnes of incremental capacity was added. And over the next two years, it’s expected around 50 -60 million tonnes will come in. Some of this is taking place in the northern region, a key market for ACC.
However, prices have held up pretty well so far, across most of the country, even though capacity utilisation may have come down to 86 per cent from levels of 97 per cent seen in 2007-08. The south, in fact, has seen prices rise though in the east they have eased. While ACC’s volume growth was strong in 2008, it was a difficult year for the company because high input costs hurt margins and pushed down net profits by about 16 per cent to Rs 1,213 crore. In 2009, costs will fall because prices of coal are down. However, it could still be a tough year for cement producers because prices may be under pressure.