Cement prices likely to soften

Fresh capacity addition seen as trigger: Fitch report.

With new capacities coming up in the domestic cement sector, the spiralling of cement prices may experience a pause.

According to a Fitch Ratings report on the outlook of the cement industry in the country, cement prices will "start softening from the second half of calendar 2007, driven by capacity additions that are expected to go onstream during FY08 (financial year 2008) and FY09 (financial year 2009)".

However, cement industry analysts differ. "The rate at which domestic cement consumption is growing, it does not seem that the prices will see any relaxation in 2007," an analyst said. The tight demand and supply situation would prevail for at least another year, he added. Prices might go down only in the fourth quarter of FY09, he further said.

The Fitch report says estimates of capacity expansions are large during FY08 and FY09, with most of the burden on operating rates being felt in FY09.

The country's cement market, with domestic consumption of 135.56 million tonne (FY06) and an installed capacity of 160 million tonne, is the world's second-largest after China. The cement industry is expected to see a fresh addition of around 75 million tonne by FY09.

"Aggregate new capacity of 70-75 million tonne should go onstream by FY09, which, despite the growth in demand of 10 per cent a year estimated by Fitch, could potentially lead to a situation of oversupply," the report states.

While the long-term demand fundamentals remain strong, pricing pressures will prevail in the medium term, which could be accentuated by increased blending capacity and an expected decline in exports, it says.

However, industry experts do not expect surplus production in 2007. On the other hand, according to them, demand will remain robust. So this will not allow any let-up in the prices.

There has been a capacity addition of 4-5 million tonne this financial year. Next financial year is expected to witness another fresh addition of around 15 million tonne. Analysts believe that these new capacities are unlikely to knock down the prices. The calendar 2006 saw the country's cement intake grow at nearly 12 per cent to 145.44 million tonne compared with 130 million tonne in 2005.

The production in 2006 rose 11.5 per cent to 152.35 million tonne against 136.67 million tonne a year ago.