Indian Cement Firms to See Pricing Pressure from Sept
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The cement industry, which is heavily dependent on housing and construction, two segments that, in turn, are steel guzzlers themselves, will feel a pricing pressure going into the second half (H2) of the current financial year (2020-21), after the dust settles on the pandemic outbreak across the country. Yes, indeed, analysts expect demand in the cement sector to rebound only from September 2020 onwards, or post-monsoon, that is.
After witnessing a meaty increase of INR 25-INR 40 per bag across markets in the last financial year, cement prices are expected to decline in the range of INR 5-10 per bag in the current fiscal. An analyst, corroborating this, said cement prices are expected to witness pressure in the current year on account of the fact that there is no demand, at present, a scenario that has become the norm across industries on the heels of the outbreak of COVID-19. All cement units have gone into shut-down mode since the lockdown. There is no production because there is virtually no demand with housing, construction and infrastructure having come to a grinding halt. If the cement companies keep producing in a no-demand scenario, they will have to incur all the variable costs, which is highly avoidable in the current scenario.
Explaining the pricing pressure in an exclusive chat with SteelMint, Anupama Reddy, Assistant Vice President, ICRA Limited, emphasised that, going into H2, cement companies will possibly not be able to increase prices given that the ability of their end-consumers to accept such a rate increase may be lower, owing to pressure on the latter's profitability metrics. Further decline in prices would also not be significant given that cement companies show pricing discipline.
Housing enjoys almost 60% demand share in cement. Infrastructure accounts for 20-25% share and industrial and commercial construction bring up the rear at 10% of demand.
Input prices lower
However, going forward, Reddy said that, while there could be pricing pressures for the cement companies, on the margins front, one factor would possibly work in their favour. And, that is the downward price trends of input materials like pet coke and thermal coal. Imported pet coke prices till March 2020 have been lower by 20-25% year-on-year (Y-o-Y), which is a significant drop. Crude prices have been on a declining trend. Consequently, pet coke prices could see a further drop. The decline may not be in tandem with the fall in crude prices but still they would be lower and work to the advantage of cement companies.
Coal prices too have been at low levels. In fact, Indonesian mid vol thermal coal of 4,200 GAR averaged USD 44.93/MT CNF India (Paradip Port, Odisha) over April 2019 to March 2020 (FY20), down 11.7% Y-o-Y compared to USD 50.88/MT in FY2019 (April 2018-March 2019). Similarly, South African RB2 (5,500 NAR) coal averaged USD 69.81/MT CNF India (Paradip Port, Odisha) during FY2020, down 21.5% Y-o-Y against USD 88.92/MT in FY2019. And, going forward, analysts do not see prices of coal shooting up either because demand is low.
Thus, on the cost side, there is not much of a pressure on the cement companies to goad them into becoming too aggressive on the pricing front from the second half.
Growth hit
In financial year 2018-19 (FY19), the cement industry had seen a double-digit growth of 13.3%, which had acted as a booster dose since the sector had not seen this kind of a spurt in the last decade and it had been mainly driven by affordable housing, especially the Pradhan Mantri Awas Yojna (PMAY) and a bit of infrastructure push from the government as well.
However, analysts clarify that the government, in the current year, probably will not have the kind of resources to pursue such projects after handling the COVID-19 impact through various relief packages.
Another analyst said it is too early to predict by how much demand could spurt in real estate and construction, and that some numbers would emerge from Q2. "We will have to wait and see how the sectors evolve. Because, the negative impact of this disruption will be on the income, profitability and liquidity positions of the construction and real estate companies. It all depends on how quickly they bounce back," the analyst added.
Offtake to take a hit
Indeed, demand has been almost nil so far in the first quarter (Q1). It is likely that the COVID-19 impact will continue through the entire Q1 and into Q2, because the monsoon would set in by then - a period in which demand, in any case, remains low.
And several factors will have to be in place for most of the construction and real estate activities to pick up and these include parameters like finances, raw material (especially sand) availability, labour management etc. Thus, analysts expect on ground activity to pick up only from the second half. "For cement, it all boils down to the consuming sectors, which are real estate, construction and infrastructure," reiterates Reddy.
"Importantly, the impact will be there on offtake beyond the immediate near term because of the overall domestic demand compression that will arise from the loss of income from prospective consumers," observed Reddy.
By Madhumita Mookerji
