The economy may be showing signs of recovery, but none of it is percolating down to the cement industry yet. Prices continue to soften, pointing to weak demand.
A survey of cement dealers by Karvy Stock Broking Ltd found average cement prices fell from Rs.316 a bag (a bag equals 50kg) in September to Rs.300 last month. A similar survey by Reliance Securities Ltd shows prices softened from Rs.304 in October to Rs.299 last month.
The drop is more acute in northern region, followed by the central part of the country. According to Karvy, prices in the region dropped 8% from September due to tepid demand in rural areas and urban housing. “The weakness in rural economy (which consists of ~40% of the total country’s demand) has been the key drag. Other factors like oversupply in urban real estate market, labour shortages, weak south-west monsoon and heavy rainfall in Tamil Nadu & coastal Andhra Pradesh are playing a key role in sluggish demand in near term,” added Karvy.
The indications are that prices may remain weak in the current month as well. Sentiment in rural areas remains downbeat due to pressure on farm incomes and weak winter crop prospects, reflected in slow progress of sowing.
According to Reliance Securities, prices may remain suppressed in the near term. “Most of the dealers are of the view that prices are unlikely to witness any uptick in December 2015 and may soften a bit as some of the companies will try to push the volume so as to meet year end targets. Notably, many pockets have already witnessed a price correction in the last 3-4 days especially in Western and Northern markets,” Reliance Securities said in a note on 5 December.
If indeed prices remain depressed or soften further, it can weigh on realizations in the December quarter. While volumes may also remain muted, the only silver lining is that easing energy costs may help cushion the impact of poor utilization to some extent.