Subdued volumes upset earnings prospects of cement cos: Icra

While cement prices have been affected in the southern and western markets, volume growth has been adversely impacted in all regions in November following demonetisation, rating agency Icra said today.
"In the southern market, the prices have shown a decline of Rs 30/bag in October and November together, with the current prices hovering around Rs 300/bag. On an average, in the southern market, the cement prices during 8M FY2017 stood at around Rs 305/bag, lower by Rs 20/bag when compared to 8M FY2016," Icra said in a statement.
A similar decline in prices post demonetisation was witnessed in the western markets wherein the price, after having recovered by Rs 15/bag in October to Rs 265/bag, slipped to Rs 240/bag in November 2016.

"On a Y-o-Y basis, the average cement price during 8M FY2017 around Rs 260/bag is down by Rs 10/bag, compared to 8M FY2016. The November prices for the East and the North remained stable at Rs 325/bag and Rs 335/bag, respectively," it said.
While cement prices have been affected for the South and West, volume growth has been adversely impacted for all regions in November 2016, following demonetisation.
"Given that a significant portion of the cement demand is driven by real estate, it is likely to get impacted in the near term.

"The demand slowdown from the realty sector is expected to be offset to some extent by infrastructure demand, specifically backed by Central government funding," Icra Ratings Senior Vice President Sabyasachi Majumdar said.

"During 7M FY2017, cement production stood at 168.15
million tonnes, a moderate growth of 4.8 per cent over 7M FY2016. However, this is an improvement when compared to 2.9 per cent of production growth reported in 7M FY2016, over 7M FY2015," the statement said.
Weak demand growth is also expected to result in a decline in prices and profits given the limited ability of the industry to pass on the cost increases (particularly power and fuel costs) given the oversupply situation that is persisting in most regions of the country, Majumdar said.
Operating profitability of the cement companies is under pressure on the back of the rising pet coke, coal and diesel prices in the recent months.

Pet coke prices have been increasing since February 2016 and reached at around Rs 6400/MT in November 2016, an increase of 36 per cent over the last six months due to the higher domestic demand, coupled with the supply constraints.
Given the large usage of pet coke across companies and its rising prices, going forward, cost savings are likely to get diluted.
While coal price witnessed some recovery during May-September 2016 with the price being higher by 9.5 per cent as against the price recorded during the corresponding period of the previous year, the month of October 2016 saw a sharp spike with the prices crossing USD 100/MT for the first time since 2012.

The recovery in prices can be primarily attributed to supply side cuts and the sudden surge in demand from China.
"Also, during H1 FY2017, there has been a nearly 8 per cent increase in diesel prices when compared to H1 FY2016. The trend has continued in October, during the third quarter, wherein the diesel prices have increased by 17 per cent. This is likely to put pressure on the freight costs of cement companies during Q3 FY2017," the statement added.