Southern cement firms opt for output discipline

Demand sluggish, prices to remain under pressure for a few months

After a steep rise in September, cement prices have softened in the past few weeks. While sluggish demand is likely to continue, industry insiders say production discipline, primarily in the southern states, would keep prices stable in the months to come.

In September, the Chennai market had witnessed the steepest increase of around Rs 60 a bag. South India as a whole saw the sharpest rise in prices, with Hyderabad, Kochi and Bangalore witnessing a rise of Rs 40-60 a bag. However, as the situation did not improve as expected, a partial rollback of prices by Rs 10-15 a bag was effected, dealers said.

Currently, prices in the Kerala market stand at Rs 360 for a 50-kg bag, while in Hyderabad it is slightly lower at Rs 290-295. “For several multinational companies that follow a calendar year fiscal, December is the year-end. So, there is likely to be some aggression in pricing. Also, in South India, the companies are practising production discipline to avoid a demand-supply mismatch,” said a Mumbai-based analyst who did not want to be named.

Southern states account for a-third of India’s net installed cement capacity of around 360 million tonnes. However, companies there are operating at a lower capacity utilisation. “In the east and north, capacity utilisation levels are 80-90 per cent. In the south, however, it is  around 70 per cent,” said Vinod Juneja, managing director of Binani Cements.

Another analyst says given the sluggish demand, it was unlikely that companies in the south would increase capacity utilisation in the near term. “Production discipline,  can only change if demand picks up. Right now, that seems unlikely.”

While companies don’t talk about it, capacity use is coming down by at least five percentage points on average in the south. Such a cut would  mean six to 6.5 tonnes of lower production, and, in turn, lower availability in the market.

A recent Citi Research report on the cement industry: “Prices are stabilising in South (India) following production discipline; however demand has worsened due to the impact of the cyclone, floods, reduced ability to sell volumes in the West (muted demand). While producers are attempting to keep prices stable, dealers expect a correction.” Part of production from southern companies, especially in Andhra, is going to Maharashtra.

On the western markets, the report noted: “Demand continues to be weak. However, prices have held up (due to production cuts).” Prices in the western market are in the range of Rs 290-320 a bag, with prices in the Mumbai region being around Rs 320 a bag. However, fresh capacity coming on stream is likely to put some pressure on prices in the central and western zones.

The Citi report pointed out: “ABG’s six million tonne per annum (mtpa) plant in West India and Reliance’s five mtpa plant in Central India are expected to impact the market in the second half. Overall, we expect 24 mtpa of new capacity in FY14, demand-supply gap to widen with utilisation at record lows (less than 70 per cent).”

A Mumbai-based dealer said: “For the next two months, cement prices would be under pressure; however, later when railway wagons demand increase for food grain transport, supply issues could put upward pressure on cement.”

According to the Citi report, prices dropped by around 10 per cent in October this year north India as demand remained weak. Dealers expect a further five per cent cut from the current levels.

Shailendra Chouksey, whole-time director, JK Lakshmi Cement, said: “So far, we have not seen much spending on infrastructure before elections. However, after Diwali, we expect the demand to pick up.”

Prices in Delhi are at Rs 270-280 a bag now. As for the East, excessive flooding and lack of sand availability have resulted in limited cement movement and prices declining by four per cent.