International
Indian cement sector: challenges ahead
23/05/2011 10:43:44 AM
Indian cement producers have been experiencing a challenging operating environment hindered by a slowdown in the real estate and infrastructure sectors as well as rising input and energy costs.
With demand in the fourth-quarter rising by a subdued 4.8%, compared to 10% YoY, fresh doubts have been raised over the sustainability of recent price increases and the profitability of producers going forward.For the quarter ended 31 March 2011, ACC reported a drop of 11% in its consolidated net profit at INR350.17 crore (US$77.9m) against INR392.88 crore in the year-ago period. This was despite an advance in volumes at 6.16Mt (5.58Mt in the year ago period) as the company saw a sharp rise in energy expenses driven by higher coal prices, as well as rising raw material costs such as slag and fly ash. Ambuja Cement also reported an 11.8% decline in net profit to INR407 crore from INR462 crore YoY, while net sales saw an increase of 10.9%. Again, the company cited substantial rises in operating costs during the quarter, higher grid tariffs and an increase in freight rates. Grasim’s cement volumes, meanwhile, advanced 7% to 11.07Mt, supported by the acquisition of Star Cement. UltraTech reported a 5.4% growth in its profit before interest and taxes at INR903.7 crore for the quarter ended March 2011. Revenue during the period grew by 6.8%. Net profit for the quarter stood at INR 726.7 crore. For the full financial year the company saw a decline in revenue from INR13,442 crore in 2009-10 to INR13,210 in 2010-11. “FY11 recorded industry demand growth of 5.3%, the lowest in the last 10 years. This was primarily on account of the de-growth/subdued growth in various key cement consuming states driven by lower infrastructure spending, slowdown in the realty sector, an extended monsoon and non-availability of railway wagons,” the company said in a statement.Exacerbating the situation is the growing supply-demand imbalance as new capacities being brought on-stream. During FY11 the industry saw capacity additions of around 28Mt on top of more than 60Mt in FY10, resulting in a surplus scenario, which some industry insiders say could last for the next three years. As a result, capacity utilisation is expected to be around 77% and 85% in FY12 and FY13, respectively.For the first few months of the year, national cement prices have been increasing as producers aim to pass on rising manufacturing costs. However, industry insiders say price hikes have arisen because producers are taking a more disciplined approach and scaled back production, rather than as a result of real increases in demand. During the fourth-quarter, prices ranged from INR275 in the south to INR231 in the Central region. Analysts at Elara Securities (India) do not envisage significant price rises going forward until utilisation rates improve. “Historically, the cement industry has gained pricing power only when capacity utilization surpasses 85% in FY12. Thus we expect all India cement prices to increase only by 1.7% to 3.3% on an average over FY11.” The firm says it expects the south to witness the smallest rise of 2% while Central India may experience increases of up 3-4%.Forecasts from UltraTech put cement demand growth for the coming year at 8.5% on the back of government initiatives in rural development, infrastructure and housing. Cement makers are expecting a positive surprise as the current five-year plan period is nearing an end and infrastructure work could be accelerated for completion. However, earnings are expected to remain under pressure through FY11-12 and with the pricing environment expected to remain volatile, uncertainty in cement earnings is likely to persist until FY13. Local producers are working hard on improving operational efficiency, thereby partly mitigating cost pressures, but a revival of strong demand remains critical as the industry moves into the subsequent quarters. PT_Source:cemnet.com