Prices ease slightly, save high margins for manufacturers

September 2019
Prices ease slightly, save high margins for manufacturers

Cement prices remain at higher levels even in weak season, even as demand growth is expected to moderate to single digit this fiscal from double digit growth posted last fiscal.

Cement prices have eased slightly in August 2019 after remaining flat in July 2019. However, at current prices the cement manufacturers are expected to post higher profits in the quarter ending September 2019, on the back of rising trend in prices for four months since March 2019 and lowering cost, mainly of fuels.

Meanwhile, experts are pegging the demand growth during the current fiscal at 7 per cent, much below 13 per cent recorded last year. While normal monsoon is heralding good times for agriculture activity, intensive floods witnessed in some major states could have played havoc with farm outcomes.

The ET Cement Index that tracks countrywide cement price movements was down by 1.36 per cent to 2364.7 by end-August 2019 from 2397.3 points at the beginning of the month, after being flat in July. Mid-way through the monsoon season, the cement manufacturers are unlikely to raise prices. So, one has to wait till third quarter (October-December) before the demand and supply play comes into action. Even the fears of economy slowing down are also haunting the sentiment.

Tempered growth
Rating agency ICRA has pegged the cement demand growth for the current fiscal at 7 per cent compared to 13 per cent growth witnessed in FY2019, while citing "relatively weak offtake seen in Q1 (April-June) FY2020 (2019-20)". However, ICRA notes: Although this is likely to affect cement manufacturers, they are likely to benefit from the fact that average prices for FY2020 (2019-20) are likely to be better than FY2019 while costs are likely to be lower. This is likely to support near term profitability for cement mills.

Sabyasachi Majumdar, Senior Vice President & Group Head - Corporate Ratings, ICRA says, "We expect cement demand growth to taper off in FY2020 after a strong double-digit growth in the previous year. This is already being reflected in tepid growth in Q1 FY2020, on the back of slowing of the project execution on account of general elections (usually resulting in labour unavailability)."

Steep rise in prices in April and May 2019 have weakened the demand, curtailing the pricing power of the industry in the following months. In June, ET Cement Index eased 1.39 per cent at 2397.3 from the all time peak of 2431.1 points registered at the end of May 2019. With a sharp 8 per cent Month-on-Month (MoM or compared to the previous month) hike pan-India in April, average trade prices in April-June were up by 11 per cent Quarter-on-Quarter (QoQ).

The demand was impacted owing to the slowdown in the Government projects, ahead of the elections and shortage of labour, said ICRA in its note. The same is expected to pick up from Q3 FY2020, post the monsoon season. In April 2019, cement production at 29.2 million tonnes (MT) was lower by 12 per cent on M-o-M basis. Further, in May and June 2019, it declined by 2.1 per cent to 28.6 MT and by 0.6 per cent to 28.4 MT respectively.

However, ICRA expects the demand to pick up in Q3 FY2020 with the growth likely to be driven by housing, primarily rural housing and affordable housing, and improved focus on infrastructure segments, mainly road, railway and irrigation projects.

"The easing of the cost side pressures owing to decline in the input costs such as coal and pet coke prices by 13.5 per cent year-on-year (Y-o-Y) and by 11 per cent Y-o-Y respectively in April-July 2019 would result in lower power and fuel expenses during Q2 FY2020. The cement companies' profitability is likely to increase in Q2 FY2020 on the back of higher prices and lower input costs," Majumdar says.

On the capacity side, ICRA expects around 18-20 million tonnes per annum (MTPA) to get added in FY2020. Most of these new supplies are not fully integrated and are largely backed by old limestone mining leases. Also, the grinding capacity addition is higher in relation to the clinker capacity, thus, the actual production from new capacities is likely to be lower. While the incremental demand of around 24 million MT is greater than the incremental supply, the capacity overhang is likely to keep the utilisation at moderate levels - 71 per cent in FY2020, despite some increase from 69 per cent in FY2019.

Normal monsoon
For the first 3 months during this monsoon period (from 1 June 2019 to 28 August 2019), the South-West monsoon has been normal, according to Indian Meteorological Department (IMD) data. However, there has been a marginal moderation in the deviation from the normal for this cumulative period compared with a week ago. "During the previous 5 years, monsoon remained normal during this same period, but this is the first time (in the last 5 years) when the deviation from normal has been positive," says Madan Sabnavis, Chief Economist, CARE Ratings, in its Monsoon Monitor released on August 30, 2019.

There are still seven subdivisions of the 36 subdivisions in the country, which have recorded deficient rainfall. There have been equal numbers of sub-divisions (seven) which have recorded both excess and deficient rainfall, with the remaining 22 subdivisions receiving normal rainfall. "The concern revolves around these subdivisions as both excess rainfall or deficient rainfall could adversely impede sowing and cropping patterns," CARE Ratings said.

Several states witnessed large scale floods, viz. Gujarat, Rajasthan, Maharashtra, Karnataka and Kerala. The western and south-west regions of the country have received heavy rains and have been clubbed under the category of "excess rainfall". If the monsoon is normal and well-spread out in all regions, then it has the potential to increase agriculture incomes in rural areas and could impact the overall economic growth. The sowing patterns across key crops as of 23 August, 2019 has seen an improvement but the concern remains around the sowing of rice which has seen a contraction of around (-) 20 lakh hectares from normal and a year ago.


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