CEMENT PRICES RISE AS REALTY DEMAND EBBS

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 remain high and so do interest rates – both factors keeping away buyers. There isn’t much construction happening as major big projects remain stalled. And also because of the monsoon, there is not much of construction happening. Yet, despite all this, cement prices have started moving up.

In the past one month alone, cement prices have risen by a whopping 30% and cement price now hovers around Rs.275/50 kg bag. And that’s not all – it is expected to go up further to Rs.325/bag in the coming few days, heralding the coming of the festival season and going away of monsoon. And the news on the street is that price is only expected to go up further by around Rs.10/bag very soon 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.

Two reasons for this illogical price rise. Firstly, this was a trend seen last year too. More than increase in demand, the rise in price is due to reduction in utilisation level, being labeled by manufacturers as ‘production discipline’. Like in the South, despite fall in demand, price remains steady at Rs.260-270/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.

The second reason – elections. With elections round the corner, cement is always a big source for generating funds. Soon political parties will approach companies for funds (donations) and this rally, many say, is a prelude to the coming elections.  But there are also studies which point out that a few weeks, four to five weeks before elections, cement prices start coming down. Politicians with “extra” money and not knowing where to park the black money, park it in realty – that is the implicit bond between politicians and realty developers. And when elections come calling, they liquidate these assets to raise funds for their election campaigns. Thus the relationship between election and money is the same as cement and construction.

In the coming months, cement sector is sure to see a lot of volatility. The outlook for the sector remains cautious despite the higher realization as it could be partly offset by higher freight charges and interest expenses. Thus we should expect margins to be either show pressure or remain status quo in the months to come.