In the southern market, the prices have shown a decline of Rs30/bag in October and November together, with the current prices hovering around Rs 300/bag. On an average, in the southern market, the cement prices during 8M FY2017 stood at around Rs. 305/bag, lower by Rs. 20/bag when compared to 8M FY2016. A similar decline in prices post demonetisation was witnessed in the western markets wherein the price, after having recovered by Rs 15/bag in October to Rs 265/bag, slipped to Rs 240/bag in November 2016. On a YoY basis, the average cement price during 8M FY2017 around Rs. 260/bag is down by Rs 10/bag, compared to 8M FY2016. The November prices for the East and the North remained stable at Rs 325/bag and Rs 335/bag, respectively. While cement prices have been affected for the South and the West, volume growth has been adversely impacted for all regions in November 2016, following demonetization.
Mr. Sabyasachi Majumdar, Senior Vice President, ICRA Ratings, says: “Given that a significant portion of the cement demand is driven by real estate, it is likely to get impacted in the near term. The demand slowdown from the realty sector is expected to be offset to some extent by infrastructure demand, specifically backed by Central Government funding. Nonetheless, overall, the demand for the cement sector is expected to be adversely impacted by this development in the next two to three quarters.”
During 7M FY2017, cement production stood at 168.15 million MT, a moderate growth of 4.8% over 7M FY2016. However, this is an improvement when compared to 2.9% of production growth reported in 7M FY2016, over 7M FY2015.
“Weak demand growth is also expected to result in a decline in prices and profits/MT given the limited ability of the industry to pass on the cost increases (particularly power and fuel costs) given the oversupply situation that is persisting in most regions of the country,” Mr. Majumdar reiterated.
Operating profitability of the cement companies is under pressure on the back of the rising pet coke, coal and diesel prices in the recent months. Pet coke prices have been increasing since February 2016 and reached at around Rs. 6400/MT in November 2016, an increase of ~36% over the last six months due to the higher domestic demand for pet coke, coupled with the supply constraints. Given the large usage of pet coke across companies and its rising prices, going forward, cost savings are likely to get diluted. While, the coal price witnessed some recovery during May-September 2016 with the price being higher by 9.5% as against the price recorded during the corresponding period of the previous year, the month of October 2016 saw a sharp spike with the prices crossing $100/MT for the first time since 2012. The recovery in prices can be primarily attributed to supply side cuts and the sudden surge in demand from China. Also, during H1 FY2017, there has been a nearly 8% increase in diesel prices when compared to H1 FY2016. The trend has continued in October, during the third quarter, wherein the diesel prices have increased by 17%. This is likely to put pressure on the freight costs of cement companies during Q3 FY2017.