The Hindu Business Line : Q3 likely to be a mixed bag for cement cos

Mumbai, Jan. 6 The third quarter of the financial year is expected to be a mixed bag for the cement industry. The cost push has receded with the drop in energy and freight expenses, but demand has also dipped leading to inventory pile up and fall in prices.

The top seven cement companies including ACC, Ambuja Cement, Grasim, UltraTech, Birla Corporation, India Cements and Shree Cement, which together command over 75 per cent market share, produced about 43.9 million tonnes of cement in the third quarter of 2008-09, an increase of 7.3 per cent compared to the same period last year, according to India Strategy report by Motilal Oswal.

Demand grew at 7-7.5 per cent in the third quarter, while it grew 6.9 per cent in first half of fiscal 2009. It would have been much higher if not for the muted growth in the northern and western regions, the report said. The southern and eastern regions continued to grow at 10 per cent and the central region witnessed recovery in demand at 11 per cent.

Cement demand was impacted by the slowdown in the housing sector and large-scale imports in the northern region. Financial crisis forced many builders to either postpone or abandon projects.

Capacity utilisation

In line with the fall in demand, capacity utilisation may fall to 85 per cent against 95 per cent recorded in the same period last year. The dip in capacity utilisation can also be partly attributed to 31 million tonnes of capacity added in the last one year.

Cement major ACC decided mid-December to shut down one of its kilns at Gagal in Himachal Pradesh for 15 days due to poor offtake. Many other cement companies had also cut down on production.

Production cost

The cost of production for cement companies was down marginally with energy and freight cost moderating due to the global recession. Prices of imported coal and pet coke declined by 60 per cent from their peak in the first half of the fiscal 2009, while crude prices plunged 70 per cent in the international markets.

Diesel prices were reduced by Rs 2 a litre. However, the benefit of drop in imported coal prices will be fully realised only in the fourth quarter of fiscal 2009.

Cement companies had cut prices by Rs 4-Rs 8 a 50 kg bag after the Government reduced excise duty by four per cent in December.

Realisation

Realisations may gain 3.5 per cent at Rs 239 per 50 kg bag in the third quarter of fiscal 2009. While prices in the south were higher on a quarter-on-quarter basis by 3 per cent, it was stable in the western and northern regions; those in the central and eastern areas declined, the report said.

Export realisations have declined $10 a tonne (f.o.b.) to about $53-55a tonne, whereas clinker realisations have fallen $5 a tonne (f.o.b.) to about $48-50 a tonne. However, demand from the export market remains stable. Decline in export realisations may impact UltraTech Cement and Ambuja Cement.