The Hindu Business Line : New capacity coming up may see a drop in cement prices

Chennai, May 16 Nearly 15 million tonnes (mt) of new cement capacity — almost 40 per cent of the existing capacity of 38 mt — will go on stream in the South by the third quarter of this financial year. This is expected to result in a significant drop in prices.

Cement prices now rule around Rs 240 for a 50 kg bag, up from about Rs 210 in the last one year. The increased capacity, manufacturers say, is sure to have an effect on prices. They are only divided on when the drop will happen — October-November, according to some, or by February 2009, according to others. They do not want to hazard a guess on how much the prices will drop.

Manufacturers, who are budgeting for a reduction in prices, are a worried lot because of the rising input costs.

They are concerned as the costs of all major inputs including coal and gypsum are continuing to increase.

Power and fuel account for about 60 per cent of the variable cost of production of cement, manufacturers say. Coal is the main input and prices have doubled to $140 (Rs 5,600) a tonne. Manufacturers use coal to generate power and in the cement production process in the kiln. The increase, in the last one year alone, represents an addition of about Rs 160 crore a year in coal costs for a cement plant with a capacity of about 3.5 mt a year. This adds about Rs 460 to a tonne of cement.

Gypsum cost has gone up four times in the last one year — from Rs 300 a tonne to about Rs 1,200 now.

Excise duty of about Rs 600 a tonne (up from Rs 400 last year) and VAT of about Rs 500 a tonne — adds Rs 1,167 to a tonne of cement.

In Tamil Nadu, against the established capacity of about 12 mt — which now matches consumption — the increase would be about 6-7 mt. Major players, including Madras Cements, Chettinad Cements and Dalmia Cements, are likely to add about 2 mt each and about 1 mt more is expected from de-bottlenecking operations from others.

In Andhra Pradesh, against a capacity of about 26 mt, an additional 8-9 mt is expected — with Ultratech contributing 4 mt and the rest from Penna Cement, Priya and Sagar Cements.

Manufacturers say that Tamil Nadu mills would have to look more at the Kerala market to move out the excess. The focus would be on efficient distribution, with the growth in consumption expected to match supply. But prices are bound to come down as there is definitely no chance of a hike, they say.

Manufacturers say the cost of cement in the overall cost of an apartment is not significant. Going by the industry thumb-rule, developers use an average of 17.5 kg of cement for a sq ft of residential construction. That is Rs 84 a sq ft in a unit that ranges between Rs 3,500 and Rs 7,500 a sq ft in the most popular segment.

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