India’s Cement Makers Run Into Headwinds
Companies and analysts say costs are on the rise and demand is expected to remain muted, capping margins.
Cost savings, better-than-expected realisations and higher prices helped India’s cement makers in the quarter ended June even as volumes declined after the coronavirus pandemic disrupted everything from production to supply of goods. But now the industry may have hit a bump.
Companies and analysts say costs are on the rise and demand is expected to remain muted, capping margins.
India’s construction sector was dealt a blow after the government restricted production and movement of people as it tried to prevent the spread of the Covid-19 pandemic. The world’s biggest lockdown completely stalled operations in April and most of May, hurting demand for the cement makers, before the nation started easing curbs.
And while uncertainties around demand remain and cost tailwinds recede, cement makers try to find solace in pricing power.
Here’s what at play…
Higher Costs
Rising pet coke and diesel prices may increase energy and logistics costs, which account for more than 60% of total operating expenses for industry leaders like UltraTech Cement Ltd., dragging financials.
Prices of pet coke—a key fuel used in cement making—have risen from their May low of $61 a tonne to $90 so far in September. That’s a rise of 12% month-on-month and 13.5% over the year ago. Diesel prices, too, have rallied close to 10% year-on-year, though they fallen slightly over previous months.
According to Macquarie, the full impact of higher petcoke and diesel prices will likely reflect in the quarter ending Decembergiven companies normally have one-three months' inventory.
Subdued Demand
UltraTech and ACC Ltd., in their annual reports and investor presentations, highlighted muted demand and extremely tough period for the cement sector.
The industry witnessed a contraction in demand for the first time in two decades in FY20. The impact, according to UltraTech, will continue in near term due to the Covid-induced weakness, leading to subdued performance of the company in the current financial year.
According to ACC, the current calendar year would mark the steepest fall in demand for the industry.
Analysts, however, have a less grim outlook.
Macquarie, in its report, said demand for the sector may fare better than estimates. According to its channel checks of dealers, industry demand fell 2-4% year-on-year in the July-August period compared with a predicted decline of 5-6% and a 32-34% slump in the quarter ended June.
HSBC Global Research now expects industry’s demand to drop 14% in the financial year ending March 2021 compared with an earlier forecast of 17% decline, aided by better-than-expected rural demand.
Pricing Holds Key?
August is a seasonally weak month for cement makers on account of monsoon rainfall. For the past 25 years, Motilal Oswal said, volumes in August are 12% lower than the annual average.
While the seasonal weakness have so far led to a drop of Rs 10-(3-4%) 15 per bag in cement prices in trade markets—sales to dealers and distributors—in the quarter ending September, they rose by Rs 15-30 per bag (5-10%) in non-trade markets or direct sales to customers, the brokerage said.
The pan-India average price, Motilal Oswal said, is still up 3% year-on-year, led by the southern region where the price rose 15%. This is on account of a sharp Rs 70-90 a bag hike in April-May.
According to HSBC Global Research, India’s cement sector continues to be in a demand-pricing paradox as the top five manufacturers registered a record high Ebitda per tonne in the quarter ended June, aided by resilient prices and lower costs, despite a 29% fall in volumes.
Resilient prices, however, drew attention of Roads and Highways Minister Nitin Gadkari, who in his recent speech at Bitu-Con 2020 hinted at possible “cartelisation” and “black marketing technique” in the cement industry. The sector in the past has been penalised by the Supreme Court for anti-competitive behaviour. Because of this, Gadkari said, the ministry is forced to return to use of bitumen or flexible pavement roads.
Still, Ritesh Shah, analyst at Investec, remains positive on cement makers’ profitability despite muted demand. That, according to him, is because discounts offered may come down, keeping net prices intact.
Citi Research also said a better-than-expected demand and prices will keep earnings resilient.