>CEMENT PRICES CRASH IN SOUTH INDIA

Cement prices in south and west regions have been falling steeply over the past two weeks, as the increase in supply is outstripping that in demand. At present, cement is cheapest in Hyderabad, at Rs123–145 per 50kg bag—down 18% in the past two weeks and 45% from the peak price reached in April 2009—the sharpest price fall in the past 15 years. According to dealers, price cuts have become a daily occurrence in the southern markets. In Gujarat, price declines have accelerated as supplies originally intended for exports have been diverted to the domestic market, given dwindling demand from the Middle East. Prices in the north have dropped by 2-3% in the past two weeks as supplies to the central region have reduced.

Prices crash in south markets: Cement prices in the south have dropped by Rs15-30/bag in the past two weeks, because of a combination of sharp increase in supplies following huge capacity expansions from small and medium producers, and poor demand from the infrastructure and housing segments. Further price declines could lead to EBIDTA loss for a few cement companies in the Nalgonda cluster in Andhra Pradesh (AP) and is likely to act as a support for prices going forward in Hyderabad. (We estimate EBIDTA loss for selling price below Rs120 per bag, given that cost of production is Rs85, freight Rs7, excise duty Rs11.5, state VAT Rs13, and dealer commissions and other sundry expenses are Rs3). Dealers said a few producers in AP have stopped supplying to Hyderabad and have started focusing on other markets in neighbouring states.

Western markets negatively affected by slowdown in exports and increasing supplies from south: Cement price in Gujarat has declined by Rs15-20 per bag in the last two weeks, as exports to the Middle East have taken a hit, with demand moderating and supply in that region increasing as new production capacities are commissioned. Increasing supplies from the south to Maharashtra have depressed prices by Rs10-20 per bag. We expect sharp price declines going
forward in the western region, as supply increases from Murli Industries, JK Cement and Jaypee Cement are likely to lead to intense market share competition in the region.

Slowdown in demand depresses prices in central region and has a slightly negative effect on prices in the north: Demand from the infrastructure segment has reduced in Uttar Pradesh, following Supreme Court’s ban on construction of memorials in UP. Dealers indicated that offtake is depressed on account of payment delays in government contracts. Prices have declined by Rs10-15 per bag in the last two weeks in the central region. Sluggish demand in the central region and increasing supplies from Grasim’s new plants led northern region prices to decline Rs5 per bag.

To read the full report: CEMENT SECTOR