The Hindu Business Line : Cement sector may report subdued earnings in Q2

Mumbai, Oct. 10 Despite a fall in coal prices, cement sector is expected to report another subdued earnings in the second quarter ended September 30, 2008 due to prolonged weakness in demand.

The overall cement consumption grew by 6.5 per cent to 40.5 million tonnes in the quarter under review, almost 1.50 per cent lower than earlier expectations.

Capacity utilisation has declined to 87 per cent, its lowest level since last four years, reflecting the slowdown in consumption, coupled with a relatively higher capacity base.

For instance, in August cement consumption grew by just 3.6 per cent, lowest monthly growth since September 2006. The onus of the dismal growth lies on northern and central regions where demand declined by 9 per cent and 7 per cent respectively in August. The devastation in the northern and central region’s demand growth was contained by strong growth in the southern and eastern region.

The sharp depreciation in rupee almost negated the recent dip in international coal prices. Imported coal cost fell 27 per cent in the second quarter of the financial year 2009, while the rupee declined 9 per cent against dollar. Shrinking cheaper coal linkage supplies forced many cement companies to rely on costlier imports. Coal prices in the domestic open market also rose sharply due to increase in demand.

Price trend

Cement companies were unable to pass on the rise in input cost due to weak demand in the northern and central region. All-India average cement prices remained flat at Rs 235 a 50-kg bag quarter-on-quarter. However, prices rose sharply in the southern and eastern region on strong demand and shortage of supply.

Companies were unable to hike prices in the northern region due to large-scale imports from Pakistan. Prices in the north and central region to remain flat with a downward bias, given the tough macro environment, posing a threat on the demand side and massive capacity addition on the anvil, said Mr Kamlesh Bagmar, research analyst, Prabhudas Lilladher. Onset of monsoon in most part of the country slowed down construction activity, thus pulling down demand for cement. The pace of work is slower especially for the road construction contracts.

Road ahead

Given the economic slowdown and weakening real estate sector, cement company earnings are expected to be under pressure. Flow of additional capacity will further add to the company’s woes. “Surplus in would rise four-fold to 40 million tonnes in FY10 from 10 million tonnes in FY09, bringing down the capacity utilisation from 95 per cent in FY09 to 83 per cent in FY10,” said Mr Bagmar.