Cement prices rule higher despite lower demand

Cement offtake hasn't shown signs of revival even in the latest June quarter. After a lacklustre performance in 2010-11 with 4.5 per cent growth in despatches, the cement industry closed the first quarter of 2011-12 with despatches that were flat compared to last year's numbers.

All-India average cement price was Rs 270/bag in end-June, up 10-15 per cent from the price in June last year. Now, what helped prices despite poor despatches growth and lower consumption in most parts of the country remains a question.

Dealers say cement manufacturers tightened supply despite new capacities getting on stream. Overall capacity utilisation of cement companies have dropped to less than 75 per cent.

Revival signals not seen

Though the March-2011 quarter saw players reporting encouraging numbers with 6-7 per cent despatches growth year-on-year, the June quarter has disappointed investors.

With monsoon rains in the quarter at a low-ebb compared to last year, expectations were that the construction activities would pick up leading to higher offtake in the April-June quarter this year. But, numbers reported by the Cement Manufacturers Association don't support this view. Despatches for the period April-June were at 42.16 million tonnes, lower than 42.43 mt reported for the same period last year.

UltraTech Cement's despatches were lower by two per cent at 9.46 million tonnes and Ambuja Cement's despatch was lower by 2.2 per cent at 5.29 mt. ACC appears to have made an aggressive push to get a higher share of the cement market in the South with its new plant in Wadi, Karnataka - its despatches reported a 11 per cent growth at 5.93 mt.

Input prices weigh

Steep increase in price of input materials that include fly ash, coal and transportation fuel have eaten into operating margins of the cement manufacturers. Higher prices didn't fully compensate manufacturers for the rising cost of input materials.

International coal prices though they fell by eight per cent from the highs of $130/tonne, still continue to be 20 per cent higher over the June-2010 levels.

Power and fuel costs as a percentage of sales have risen to 26 per cent from 22 per cent a year earlier for Ambuja Cements. The company's operating margin stood at 27.5 per cent, down from 31 per cent in the corresponding quarter last year.

ACC also saw a sharp increase in costs and its operating profit margin dropped to 19 per cent from 25 per cent in the June quarter last year.

UltraTech Cement however managed to improve margins at the operating level despite higher fuel costs by cutting down on employees cost and other operating expenses. The company reported an operating margin of 29 per cent, up two percentage points, year-on-year.

Cement companies may see the higher realisation turning to their favour and help them grow PAT if coal prices subside further from the current levels.

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