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In Focus - Jan 18_ 2012

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					                                             January 18, 2012




                          January 18, 2012




              Cement Companies Hold Prices,
               But Excess Capacity A Worry




Policy & Research Unit
                                                                                       January 18, 2012




             Cement Sales Growth Eases, But Prices Firm
           Cos hold up prices by controlling output  Excess capacity may keep prices under check

                  S   lowdown in the economy has not prevented
                      the cement industry from keeping prices
                  firm, but huge capacity addition expected in the       Frequency
                                                                                   All India Cement Despatches

                                                                                         Year
                                                                                                     Lakh      %         %
                  coming two years may test the sector’s resilience                                 tonnes    YoY       QoQ
                  amid price and margin pressures.                       Quarterly        Jun-11     535.4       0.8     -7.2
                    The beginning of the current financial year was      Quarterly        Sep-11     508.1       6.5     -5.1
                    marked by low cement off-take in India. As the       Quarterly        Dec-11     556.5      10.6      9.5
                    year progressed, cement consumption, as re-
flected by despatches of companies, improved. While despatches in        Cumulative   Apr-Sep-11   1,043.5       3.6
the first half of the financial year rose a moderate 3.6% compared       Cumulative   Apr-Dec-11      1600       5.9
with a year ago, consumption rose sharply post monsoon. Cement
                                                                                                    Source: CMIE, Dhanbank PRU
despatches rose 10.6% in October-December, resulting in a growth
of 5.9% in the nine months ended December.

On a sequential basis, there was an improvement in despatches in
each of the three quarters of 2011-12 (April-March).

While October-December growth looks good, it must be noted that
low base of the previous year played a significant role in boosting
the numbers. Volumes had recorded a year-on-year decline in No-
vember and December of 2010, resulting in growth in October-
December 2011 looking robust.

Other reasons for improvement in despatches include:
 Moderate revival of demand in regions other than the south
 Year-end volume push by cement majors
 Re-stocking by dealers on expectations of rise in demand from
    this month

Demand for cement is also seasonal in nature. Usually, monsoon is
the slack period for the cement industry as construction activity
slows down.

Demand in the current financial year slowed in April-December as
major demand drivers grew at a moderate pace. Key demand driv-
ers in the cement sector include:

   Housing sector: It accounts for a large portion of domestic
    demand. Rise in urbanisation, an increasing number of house-
    holds and higher employment are primarily driving demand for
    housing. However, uncertainty about future incomes, rising
    interest rates and firm real estate prices have restrained conver-
    sion of latent demand into actual purchases. This has led to
    weakness in fresh investments in housing.

   Infrastructure development: Emphasis of the government on
    development of dedicated freight corridors, upgrading and
    building of greenfield airport projects and ports were expected
    to drive consumption. But this has not happened because of
    slow pace of execution of infrastructure projects.
                                                                                            January 18, 2012




    Industrial projects: Slowdown in the economy, policy
     uncertainty, high interest rates and weak global economic
     outlook have resulted in companies holding back their
     capital expenditure plans.

    Commercial construction: Construction of retail outlets,
     office space, hotels, malls, hospitals and schools grows as
     the economy develops. Demand for consumer-centric sec-
     tors — such as, automobiles, consumer durables and fast-
     moving consumer goods — have been impacted due to
     high inflation, high interest rates and uncertainty in in-
     comes. This has led to fall in demand for retail space and
     malls. Rising costs are also affecting the hotel industry,
     thereby resulting in hotel expansion slowing down.


                               Surplus Capacity, Output Under Check
               Cement Statistics For FY11
                                              Million
                                                             C     ement industry’s capacity stood at 228.4 million tonnes as of
                                                                   March 2011, according to Cement Manufacturers’ Associa-
                                                             tion data. Output was 209.8 million tonnes, which put capacity
                                              Tonnes         utilisation at 74.4%.
    Capacity                                   228.45
                                                             With rise in capacity in the current financial year, utilisation is
    Production                                 209.75        estimated to have fallen. Utilisation fell also because a production
    Despatches                                 208.75        discipline is being maintained amid slowing demand growth to
                                                             prevent fall in prices.
    Consumption                                207.94
    Capacity Utilisation (%)                    74.4         Despite the current surplus capacity, India’s cement making ca-
                                              Source: CMA
                                                             pacity is estimated to go up from 300 million tonnes currently to
                                                             479 million tonnes by March 2017, according to the final report of
                                                             the Working Group on roadmap for the sector in the 12th Five-
                                                             year Plan (2012-17). This is based on the assumption that the
                                                             economy will grow 9%.

                                                             According to the report, current annual capacity of the industry
                                                             has touched 300 million tonnes, the second-largest globally after
                                                             China. With another 179 million tonnes being added until 2017
                                                             implies a compounded annual growth of 9.8%. It also forecasts
                                                             demand growing 10-11.75%.

                                                             It might be pertinent to highlight here that cement demand growth
                                                             forecast, based on 9% GDP growth seems very difficult to
                                                             achieve. As per the latest (January) Fitch report on cement: “GDP
                                                             growth had an average multiplier of 1.3x on cement demand dur-
                                                             ing FY09 and FY10. This multiplier fell to 0.4x last year (FY11)
                                                             due to tighter monetary measures adopted by Reserve Bank of
                                                             India”. In the current year also, cement despatches fell in April-
                                                             September compared with over 7% GDP growth.

                                                             Several projects are due for completion by 2014. Data sourced
                                                             from company announcements and captured by Centre for Moni-
                                                             toring Indian Economy show nearly 70 million tonnes capacity is
                                                             estimated to come on stream. This will exert further supply pres-
                                                             sure on prices or will result in lower utilisation rates if demand
                                                                                                             January 18, 2012




                                            Clinging On To High Prices

                             C    ement prices continued their
                                  upward journey in October-
                             December. After the price fall during
                                                                       340
                                                                       320
                                                                                      Average Wholesale Prices of Cement
                                                                                                  (`/50 kg)
                             the monsoon season, cement compa-         300
                             nies raised prices by `7-12 per 50-       280
                             kilogram bag in September, depend-
                                                                       260
                             ing on the region. Thereafter, prices
                             in most cities have either increased or   240
                             remained unchanged at high levels.        220
                                                                       200
In addition to demand-supply dynamics, rising input costs also         180
played a role in cement price rise. In fact, the increase in cement




                                                                                                                 Apr-11
                                                                                               Feb-11




                                                                                                                                                              Sep-11
                                                                                                                                   Jun-11

                                                                                                                                            Jul-11
                                                                             Dec-10




                                                                                                        Mar-11




                                                                                                                                                                                         Dec-11
                                                                                                                                                                       Oct-11
                                                                                                                                                     Aug-11
                                                                                      Jan-11




                                                                                                                                                                                Nov-11
                                                                                                                          May-11
prices in the current financial year was mainly because of in-
creased costs being passed on the end-consumer.
                                                                                      Mumbai                      Delhi                     Kolkata                    Chennai
Prices of cement in the previous financial year, 2010-11, dipped
on account of weak demand and a substantial increase in capacity.
This year, companies maintained a production discipline and have
managed to keep price fall under control.

Companies raised prices gradually, thereby passing on the increas-
ing cost burden (cost details discussed in the next section).

A look at the region-wise prices indicates a double-digit, year-on-
year increase in most cities across the country in December. On a
month-on-month basis, prices inched up in Mumbai and Kolkata.
Despite maximum capacity addition in the southern states, compa-
nies managed to hold up prices by controlling production.

Recently, cement companies — including ACC Ltd, Ambuja Ce-
ment and JP Associates Ltd — agreed to cut prices by Rs 25 per
50-kg bag in Himachal Pradesh from January 5, 2012.

The Himachal government, in a meeting with cement majors, per-
suading them to cut prices in the state as cement in Himachal
Pradesh is costlier by Rs 50-75 a bag compared with neighbouring
states of Punjab and Haryana. This is despite cement plants being
located in the state and enjoying several incentives and benefits.

There were protests against high cement prices even in Chhattis-
garh. According to a report in Business Standard newspaper, hun-
dreds of people led by Tilda legislator Devji Patel protested at the
Century Cement plant in Baikunth. They blockaded entry points of
the plant and stopped workers from entering the unit. The protest-
ers also blocked the transport of cement bags out of the factory.

While Himachal Pradesh and Chhattisgarh account for a small
portion of total domestic consumption, there is a fear that such
protests may be followed in other areas as well, thereby affecting
bargaining power of suppliers.
                                                                                              January 18, 2012




                                                Cost Pressures Remain

 A    fter recording year-on-year fall in profitability in 2010-11
      (April-March), cement companies have slowly passed on
 higher costs to consumers. Operating costs, mainly coal, power
                                                                                             Quote Yard
 and fuel and freight, registered a sharp rise in the current year.            Business Standard
 Companies chose to raise prices on expectation of higher demand
 and protected margins. They also despatched less cement (by                   “Things (on cement pricing) will be clear
 maintaining a production discipline) to keep prices firm.                     next week, when the new bills come from
                                                                               Coal India. We expect a rise of ` 8-10 a
 Cement industry either uses imported coal or buys it from Coal                bag. We will then determine how much we
 India Ltd, India’s largest coal producer. While international coal            need to pass on.”
 prices softened in October-December, its impact was negated by                — H.M. Bangur, managing director,
 the Indian rupee depreciating. Domestically, coal prices were 30-             Shree Cement Ltd
 40% lower from prevailing international prices. However, Coal
 India changed its pricing mechanism from UHV (useful heat                     “The impact on pricing would be anywhere
 value) to GCV (gross calorific value) (refer Infocus dated Nov 23).
                                                                               between `8-10 a bag. One will pay much
 Coal India raised linkage coal prices (Grades D-F) by 50-90%.
                                                                               higher; in fact, it will double our expense,
 While analysts expect Coal India’s price rise to result in cement             as the pricing would increase by 20-30%
 industry fuel costs increasing `3-5 per 50-kg bag, cement compa-              and in some cases by 50%.”
 nies peg the fuel cost increase at around `8-10 a bag. Three large            — Shailendra Chouksey, whole-time
 cement manufacturers — ACC, Ambuja and UltraTech Cement                       director, JK Lakshmi Cement Ltd
 — source 60%, 40% and 33% of their coal requirements, respec-
 tively, from Coal India. Southern cement manufacturers source
 coal from Singareni Coal. While Singareni has not yet announced
 a change in pricing method, analysts expect it to happen soon.

 Cement is transported either through railways or roadways.
 Freight cost accounts for 25-30% of total cost. This cost segment
 has been rising because of recent rise in rail freight rates (6% in
 October) and a moderate increase in road freight rates.

 Hence, higher input prices are exerting a pressure on costs which
 is detrimental for the industry because they may not be able to
 pass on entire increase in costs to the consumer.



      PRU View: Consumption To Rise At Slow Pace Despite Healthy Demand

W      hile there exists a healthy demand for cement in India, consumption is set to rise
       at a slower pace. This is because of a slowdown in the sectors that drive demand.

Real estate — both housing and commercial — is sitting on high inventory, resulting in
postponement of start of new projects.

While government has announced huge plans for infrastructure development, the pace of
execution of these projects has been very sluggish. This is despite 2011-12 being the last
year of the 11th Five-year Plan, wherein construction should have been on in full swing.

In next two years, new cement capacity of 60-70 million tonnes is expected to come on
stream. Crisil estimates demand to rise by only 30 million tonnes, thereby resulting in
further imbalance in demand-supply situation. Hopefully, this excess capacity will be
able to keep cement prices under check.
                                                                                                          January 18, 2012




Sonal Thakur
Senior Sector Analyst                                   022-61541840

Jones Koshy
Senior Editor                                           022-61541764

Rajrishi Singhal
Head – Policy & Research                               022-61541730

Policy & Research Unit, Dhanlaxmi Bank, Trade View, Kamala Mills,
PB Marg, Worli, Mumbai 400001




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