Rising cement prices face risk from higher supply
Cement prices in most eastern states have improved by Rs10-30/50kg bag in March compared to February. Companies will benefit from higher realizations but this may not last long, as capacity additions will lead to higher supply.
The current increase in prices, say analysts after speaking to cement dealers, is due to improved demand in states such as Bihar, Jharkhand and Chhattisgarh, buoyed by individual house segments and government projects. In West Bengal, companies were facing a shortage of clinker and have increased prices as a result, they added.
Demand scenario in this region has been relatively better due to which cement makers here were able to avoid cash losses despite low utilization. Analysts say the increase in prices may be at risk from higher capacity.
Many cement makers have significant exposure to this region—large-cap companies such as ACC Ltd, UltraTech Cement Ltd and Shree Cement Ltd, and even mid-caps JK Lakshmi Cement Ltd and Birla Corp. Ltd among others. Several companies have expanded capacity in the current fiscal year, including a two-million-tonne unit commissioned by new entrant Emami Ltd at Panagarh, West Bengal, in this month. More capacity will get added in the next two fiscal years.
“East India is likely to see a capacity addition of 8-10 million tonnes in FY17 itself. Also, JSW Cement will be adding 2.4 million tonne capacity in West Bengal by FY19 and Shree Cement by another 2 million tonne. Thus, we feel that the recent price spike seen in the region is unlikely to sustain,” said Rakesh Tarway, head of research at Reliance Securities Ltd.
Also, it should be noted that Shree Cement’s grinding unit in Bihar, which had to be shut down post National Green Tribunal’s order in February, is operational now. According to some analysts, other firms were able to fetch better prices due to the supply disruption but now that the unit has restarted, it remains to be seen how it impacts prices in Bihar.