Cement stocks could underperform the market as increasing supply threatens to pull prices down.
Prices of cement are softening in some markets, as anticipated, because of increasing supply. As production from recently added capacities is ramped up and utilisation increases, they could decline further.
An estimated 75 million tonnes of capacity is expected to come on stream during 2009-10 and 2010-11 on the back of about 29 million tonnes having been added last year. As a result, prices are expected to come off by about 7-8 per cent in 2010-11, and industry watchers say they should bottom out only sometime in the middle of 2011-12.
Meanwhile, the demand is expected to grow at around 9 per cent this year and at a slightly higher rate next year driven by the infrastructure sector, and in line with the compounded annual growth between 2004-2009 of 9.3 per cent.
Currently, the demand isn’t turning out to be quite as high as expected in the eastern and southern markets. With capacity building up in the southern part of the country and the western region also somewhat vulnerable to overcapacity, prices in these markets could come off the most, say industry watchers.
Among cement makers, Grasim, say analysts sells about half its output in the south and west, through Ultratech. Ambuja Cements too has a large exposure to the western region. Besides, analysts point out that Ambuja also uses quite a bit of coal from Coal India, such as ACC, and therefore any price hikes will pinch.
However, ACC appears to be better positioned than others as just about a third of its output is sold in the west and south. Cement stocks have outperformed the broader market over the past year but have underperformed the market in the past seven months.
The BSRB cement index has nevertheless gained 69 per cent since March 2009 compared with 96 per cent for the Sensex. Since companies have been selling good volumes so far in the current year and prices too haven’t come off too sharply, earnings should not be impacted just yet. However, analysts feel next year could see earnings fall before recovering again in 2011-12. While not all analysts are equally bearish on the sector, there is near consensus that prices of cement stocks could trend downwards.