Improved Demand Helps Cement Consumption To Grow By 6.9 Per Cent in Fiscal year 2012

As per the data provided by the Cement Manufacturing Association, cement consumption for March has grown by 6.8 per cent on a YoY basis to 22.48 million tonnes. And for the fiscal year 2012 the dispatch has jumped to 224.8 million tonnes, up by 6.9 per cent on a YoY basis.

The cement industry, which was struggling to maintain the sales volume and prices from in the first half of the fiscal, has rebounded in the second half. The major concern for the industry was the falling demand and the over-supply situation with the total capacity increasing to 315 Mn tonnes led to a fall in the cement prices. This was coupled with the high input cost of power & fuel and freight which impacted the cement company’s margins.  

However, we have seen a huge situational turnaround for the cement companies in the second half of the fiscal. The cyclical nature of the business with some improvement in demand from the infrastructure space and some production cut by the cement companies provided the much-needed relief required to offset the high input cost and freight charges.

Region wise, the northern and the western belts have seen the highest jump in demand due to higher infrastructure and construction activity while the eastern region comprising Bihar, Odisha and West Bengal have seen a good price hike by Rs 20-25 mainly on account of the supply constraint and the improved demand during the quarter. Cement sales increased in Gujarat too on the back of increased government spending on infrastructure to complete various major projects. In other states the cement prices were hiked on an average by Rs 15-20 per 50 kg bag.

The trend can be seen from the third quarter GDP numbers, with the construction sector growing by 7.2 per cent vis-a-vis 4.2 per cent in the September quarter of 2011. Also, from the October month onwards the cement players started escalating the price in anticipation of the increase in demand and also to the offset high input cost. The cement prices in December were raised on an average by Rs 20 so as to price a 50 kg bag at Rs 280. This was further increased by Rs 20-25 in the March quarter, which was partially done to pass on the hike in the freight cost by the Indian Railways.

Companies who have a pan-India presence have reported decent growth in their dispatches in March and for the quarter too. Of these, ACC and Ambuja Cement reported a jump in dispatches by 6 and 11 per cent on a YoY basis in the month of March 2012. Based on the positive demand scenario we expect the cement companies to report decent growth in topline and bottomline during the March 2012 quarter.

Also, this time we see better margins for the cement companies as the improved demand has helped the cement companies to pass on the incremental costs to the consumers. The cut in duty on import of coal will help the company on the cost front but the recent hike by 20 per cent in the freight rate will eat into some of the benefits derived from the price hike.