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Cement: May See Short-Term Pricing Pressure; CCI Probe Adds to Woes
Based on recent reports from experts, the near-term outlook for the cement industry may be challenging due to pricing pressures, probe initiated by the Competition Commission of India (CCI), Covid-19 situation amongst other factors
Photo Credit : Reuters
India is home to the world’s second-largest cement industry and accounts for over 8 per cent of the global installed capacity. According to the Cement Manufacturers Association of India, the country has 545 million tonnes installed capacity and creates 20,000 downstream jobs with every million tonnes of cement manufacturing capacity. But the near-term outlook remains challenging if the expert reports from firms tracking the cement sector are to be considered.
With the probe initiated by the CCI on alleged anti-competition behaviour adopted by some companies, experts indicate a short-term impact on stock prices of listed cement companies. As on date, the stock prices of some of the leading cement scrips saw a 5-7 per cent decline. There could be a cement price-hike too on the horizon says a report from Anand Rathi Shares and Stock Brokers (ARSSB), a full-service brokerage and equities research firm. "Some short-term sentimental impact on stock prices, we believe, is likely due to CCI probe. With input prices rising, however, price hikes cannot be ruled out in the long term," it said.
As per a recent report by Motilal Oswal Financial Services and others the cement prices increased during the July-September quarter this year. "In 3QFY21, the average price is up 0.8% QoQ so far across India v/s a decline of 1.1%/ 0.7% QoQ seen in the past 5-10 years. The same is up ~7% YoY to INR360/bag. As per the channel checks, volumes are growing over 10% YoY in North, East, and Central India. While demand has remained weak in the South and Maharashtra, it has recovered strongly from the 15-20% YoY decline seen in 2QFY21. Prices in South India have been particularly strong and are up 18% YoY (flat QoQ). Prices in North/West/Central are up 7%/ 6%/ 5% YoY and 3%/ 1%/ 2% QoQ. Non-trade prices have also recovered, particularly in North where it had fallen sharply, as institutional demand (from urban real estate, infrastructure, etc.) has been improving," it said.
What is the situation now? As per ARSSB report, after firm demand in October, the month of November was partially hit by the Diwali holidays and region-specific issues, "which dealers said were temporary as infra-activity is improving and higher IHB demand is expected". "Prices across regions declined Rs 5-15 a bag except in the South, where prices were hiked by Rs 20-25 a bag in the first week of December. Pricing pressure in some regions is likely owing to volumes being pushed by companies which follow the calendar year," it added.
Financial services firm Morgan Stanley India, it is reported, had said some days ago that the month of December will be a stable month for cement pricing with the possibility of some hikes. "Industry's focus is firmly on profitability and Morgan Stanley believes cement producers have a window of opportunity to take reasonable price hikes during Dec-20 to Mar-21 as volume trends are strong," it was said. But that was before the events on December 9th. As is known, on December 9, 2020, CCI began investigating some cement companies to examine possible cartelisation. CCI team also conducted 'search' in the premises of some cement firms.
Experts suggest that the ongoing CCI investigation may restrict price hikes in the short-term. "We believe this will restrict significant price hikes in the industry in the near future. Considering rising costs in FY22, however, we do not rule out the possibility of price hikes," the report from ARSSB said.