CEMENT - DEMAND DOWN BUT PRICES UP

By Ruma Dubey

Common sense – if supply is more and demand is low, price has to be down, right? That’s simple, politics-free logic. But this logic seems to hold no good in many facets of our life, especially now when it comes to cement prices.

Realty sector is gasping for survival with skeletal demand. Housing prices are have come off the earlier highs and the interest rate cycle has finally started turning around towards lower rates – yet it will take a while for the buyers to come back and buy. There isn’t much construction happening as major big projects remain stalled. Monsoon has almost retracted which is why in North India, some construction activity seems to have picked up. But the fact remains that building activity is slow, housing is down and poor rains could dampen the sentiments further. Yet, despite all this, cement prices have started moving up.

Over the past one month, cement prices in North India rose by Rs.25-30 per 50 kg bag while pockets of Punjab and Rajasthan have shown an increase of almost Rs.70-100/bag. Prices in North on an average in Q2 hovers around Rs.305-310 per bag, that in Central India is around Rs.295-297/bag, Western India is around Rs.290-292/bag. Eastern India prices are higher at Rs.355-360/bag and like always, South India has the highest price, currently around Rs.365 per bag. And that’s not all – prices across India are expected to go up further in the coming few days, heralding the coming of the festival season and going away of monsoon. News is that price rise could be in the region of Rs.10-12/bag in northern, central and eastern regions. Price in South has remained stable and is likely to remain so in the current month.

Unfortunately, this could lead a deadly blow to the realty sector further as industry experts say that a Rs.50/bag price hike in cement leads to a direct Rs.25/sq.feet rise in construction cost. Naturally, this will be passed on to the consumer but with people already shunning realty projects, will they buy?

More than realty, the real story here is about this price rise. When demand is so pathetic, how come cement prices are going up? Those in the cement sector blame it on rising cost of raw material and seasonal rise but those in know, know better.

This has been a trend over the past few years. More than increase in demand, the rise in price is due to reduction in utilization level, being labeled by manufacturers as ‘production discipline’. Currently, the utilization of the sector is around 65%. Like in the South, despite fall in demand, price remains steady at Rs.365/bag and the same methodology is now being adopted across the country. Thus production discipline is dictating cement price and not demand. Being more of a ‘manufacturer’ led rally, more than by the market led demand-supply trend, the perception is that this ‘strength’ which we see in cement might not last too long.

Yet, if one wants to cash-in on this sector, as always, big companies like Ambuja Cement, ACC and Ultra Tech are safer bets given their higher presence in Northern region where at least some construction work is on. These companies are better equipped to reap in benefits of higher prices, even if for short term.