Cement prices to face litmus test this monsoon

Cement prices to face litmus test this monsoon:

The upcoming monsoon season may prove acid test for the cement industry as the cement prices may show a opposite trend of past three years, when cement prices showed positive trend despite falling dispatches. With monsoon just around the corner and new cement capacities expected to bunch up in H2 FY2010 it is most likely to break the past trend of simultaneous price rise with rising monsoon. Cement dispatches usually found declining during the monsoon season, which in India falls during July to September every year. The decline in price is usually caused on account of slowdown in construction activity, which further results in softening of cement prices during the monsoon season. According to the trends of cement dispatches and cement prices for over 8 years, prices tend to fall with the onset of monsoon. During FY 02-06, with the start of monsoon, cement dispatches decline by an average of 9-10% sequentially and cement prices had fallen by 4% to 5% QoQ which is considered one of the worst periods for industry. But the trend seemed to be reversing since last 3 years FY07 to FY09 as the decline in cement dispatches was not accompanied by a simultaneous decline in cement prices. The firmness in cement prices as a comparatively lower decline in cement dispatches, about 6-7% during FY07-09 period as compared to double digits declines in FY02-FY06. Secondly, a higher capacity utilisation rate during the FY07-09 as compared to earlier periods was also a cause to this firmness in cement prices.

With 25-30 mnT of new cement capacities lined up for H1 FY10, the March 2009 capacity utilisation rate is expected to see a steep fall to below 85% for H2FY10E. As a result to it, this monsoon season i.e. July - Sept 2009, the industry may not see the repeat of last three year’s firmness in cement prices. We expect cement demand to grow at 7-8% for FY10E, which might cause a fall in the cement dispatches by around 10% QoQ this monsoon, which is higher than the single digits drop witnessed in last three years. Cement prices are expected to fall Rs.10 to Rs.15 per bag in this monsoon season.