In the last three to four months, cement prices have inched their way upwards in major regional markets. After declining between February-April 2016, cement prices are now showing signs of revival. As per the recently released WPI (Wholesale Price Index) data, grey cement prices were up 3.5 per cent in August 2016 when compared with a year ago — a 13-month high.
But higher prices are not necessarily an outcome of higher demand. Demand from the housing segment could take some more time to pick-up, despite normal monsoons.
Prices move higher
Cement prices are up from the levels seen in February 2016 in the north, west and central region. These three regions put together constitute nearly two-thirds of the overall cement market in India.
However, the prices in south and east bucked the trend, with cement prices in these regions lower than what they were in February 2016.
The prices are currently the lowest in the western region, where it is selling at an average of ₹250 for a 50 kg bag, while it is in the ₹303-322 levels in the other four regional markets. But the latest report released by brokerage house Ambit Finance indicates that cement prices in this region will see a sharp recovery over the next one year. All India cement price levels were hovering a tad below ₹300 (Rs ₹298), as per latest available price data.
Pricing discipline
However, this time around, it is not the revival of cement demand which is the key driver of price increase. It is the pricing discipline among producers.
Take, for instance, the central market, where the prices improved sharply after Jaypee curtailed despatches post its agreement to sell-out to Ultratech. The trend hasn’t been too different in the North, where prices were up despite no major revival in demand (and no major price-cutting by major producers). In contrast, south was at the receiving end, witnessing a fall in cement prices, with break-down of pricing discipline among its producers.
Rural play
Rural markets are important for the cement industry, which constitute 40 per cent of overall volumes. The demand for cement comes from three sources — housing (60-65 per cent), commercial and industrial investments (20 per cent) and infrastructure (15-20 per cent).
During the first quarter of 2016-17, demand for cement (volumes) was up 6 per cent on a year-on-year (y-o-y) basis. This was much lower than 11 per cent growth that was witnessed in the fourth quarter of 2015-16. In fact, ever since demand volumes growth hit the negative territory of 1 per cent during the fourth quarter of 2014-15, it has recovered consistently in the whole of last year — its volumes growth for the four quarters clocked 1 per cent, 2 per cent, 4 per cent and 11 per cent respectively.
Increased allocation by the central government for the roads and railways sector, along with higher allocation for rural welfare schemes such as IAY (Indira Awaas Yojana), PMGSY (Pradhan Mantri Gram Sadak Yojana) and MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) has been driving cement demand in the last year.
However, housing demand (a major component that drives of cement demand) remained tepid in recent times. Two consecutive bad monsoons in the last two years have adversely affected rural income levels.
Monsoon effect
With a ‘normal’ monsoon this year, investors are hoping that cement demand grows at a faster clip. However, as per experts, the effect of normal monsoon would take a while to translate to higher demand for rural housing. It is likely that the farmers will first de-leverage or invest more in staples, instead of making big-ticket investments like housing.
However, if good monsoon is followed by a good rabi (winter) crop, farmers might look at housing, according to a broker report.
So, till 2017-18, the cement demand is expected to witness an average growth in the 6-8 per cent levels on a y-o-y basis.
Production down
Cement production too is tepid. As per Index of Industrial Production (IIP), cement output was up 1.4 per cent in August 2016, when compared with same month in the previous year. After average growth rates of 8.6 per cent in the first six months of the year, this is a sharp fall.
In the last decade, doubling of cement capacity had resulted in excess supply. Industry capacity utilisation is currently at a multi-year low of 65 per cent.