After seeing their margins hammered by rising costs and stagnated prices, Indian cement manufacturers are enjoying some respite thanks to recovering rates. Still, the outlook for Indian cement pricing remains uncertain.
This article originally appeared in the 46th issue of India Cement & Construction Materials. Click here or on the image to read the full article
High production costs, overcapacity, and low prices painted a grim landscape for the Indian cement market over the course of the past three years. With demand showing signs of recovery, hopes of reconquering pricing power reverberated in the market. A sharp increase in the average price of bagged cement, witnessed during February, seems to have vindicated the more optimists, but caution is still required.
For the past three years, cement manufacturers in India have endured a competitive market, characterized by an excess in supply and lukewarm demand. Companies have been forced to introduce their products at a discount in the market in order to maintain their sales, further depleting their pricing power.
Falling prices, combined with a sharp increase in the costs of freight and energy and the depreciation of the Indian rupee, have squeezed the profit of cement manufacturers. During the fourth quarter of 2018, coal and diesel prices rose by 5.8 percent while average price realization in the cement sector declined by 0.7 percent.
Utilization rates have been providing some hope to the sector. In the first semester of 2018, most cement producers reported an improvement in their utilization rates. Even during the third quarter, when the monsoon typically reduces the volume of construction activity, the sector was able to maintain an average rate of 70 percent, compared to 65 percent a year earlier.
Out of the six major cement manufacturers in India, three – UltraTech Cement, The Ramco Cements, and Dalmia Bharat – registered a decline in their EBITDA margins in every single quarter of the year. Shree Cement’s EBITDA margin declined in three out of four quarters, while the two companies by LafargeHolcim, ACC and Ambuja Cements, recorded a fall in EBTIDA margins in half of the quarters.
The current landscape
The end of the monsoon is usually a time when prices recover, with construction activity typically picking up. However, manufacturers were disappointed to see prices entering their fifth consecutive monthly fall during December, with a pan-Indian average decrease of one rupee. Even in southern states such as Karnataka and Kerala, the most affected by the copious rain, prices continued to fall, and in Tamil Nadu, slow approvals of real estate projects and lack of timely payments to contractors by the government – among other factors – contributed to depressed cement rates.
The real turnaround came only in February, when the average All-India prices rose by INR 17 to INR 334 per 50-kilogram bag. However, this price hike was still regionally unbalanced, with prices going up by an average of INR 40 in the southern states and by INR 14 in West India while rising only marginally or even falling in the remaining regions. Price hikes have only become fully effectively in March.
Sanjay Ladiwala, chairperson of the Cement Stockists & Dealers Association of Bombay, told the Business Standard overcapacity in the southern states has been dragging the national average. With infrastructure projects in the region coming to life and tax breaks to be felt in the realty sector, the situation has now headed towards improvement. But in spite of the latest rally, demand is still a problem for manufacturers. Dealers say that uncertainty created by the upcoming general elections is cooling down the market.
Cost-wise, petcoke prices have declined by 20 percent, opening up some breathing room to manufacturers. On the other hand, wage adjustments are expected to increase costs with staff by two percent (...)
Read the full article in ICCM 46