Mithun Roy

Mumbai: Analysts are betting that cement companies may be forced to hike prices by more than Rs 10 per bag by the time the current fiscal ends in March, especially in the south where producers continue to enjoy pricing power.

The case may not be the same in west and north India, because cement makers have very little pricing power despite soaring input costs.

“The cost of coal and pet coke have gone through the roof,” said A K Saraogi, chief financial officer and president, corporate affairs, of JK Cements.Coal constitutes around 12% of the total operating cost of cement makers, while coal prices have risen 10-15% in the recent past.

Therefore, says Ajit Motwani, analyst with broking house Emkay Research, the bigger companies may increase prices by Rs 10 in one shot — against the Rs 5 expected in January — if they intend to protect margins.

Binani Cement joint managing director Vinod Juneja agrees prices may go up by at least Rs 5 per bag in January. “How much it rises is totally a function of the mismatch in demand and supply,” he said.

What about the government wagging a finger at the sector owing to inflation concerns?

H M Bangur, president, Cement Manufacturers Association of India, and the managing director of Shree Cement, said on the market should decide which way the prices should move.

Producers are expecting demand to stay strong in the next six months.

Analyst Vishal Mishra of IL&FS Investsmart Securities said in a note to clients on December 27 that domestic demand will increase at a 10% compounded annual growth rate (CAGR) for the next three years.

This is because of the strong 8-9% gross domestic product (GDP) growth, the government’s renewed focus on infrastructure development and irrigation projects being undertaken across the country, Mishra said. He sees demand picking up strongly in January-March 2008, the peak season for construction in India.

India’s infrastructure growth in the last 12 months, and giga projects such as special economic zones have spurred cement makers to add capacity in the last two years.

Of this, incremental output would be only 4-5 MT in 2007, 8-10 MT 2008 and about 20-25 MT in 2009. So, unless cement demand growth falls to less than 6-7% - a very unlikely scenario considering the infrastructure growth imperatives - India should remain in cement deficit till June 2009, says the report.

Demand for cement is expected to grow at 10-12% annually (or about 16 to 18 MT annually), which, if holds true, should ensure that the pricing environment too remains healthy.

Also, there is a section of analysts that believe that new capacity addition could be slower than anticipated, due to constraints with respect to supply of cement manufacturing equipment.

In another note post a meeting with India Cements, domestic brokerage SSKI said the company management expects supply to lag demand at least till March 2009 driven by delay in new supplies by 6-12 months (due to delay in equipment supply & regulatory approval) and limited blending potential (due to limited availability of fly-ash for new capacities).

Additionally and on the positive side, the current industry growth is not a fair reflection of actual cement demand, as there is unmet demand due to supply constraints, SSKI said.

In fact, manufacturers have already been reported as operating at around 95% levels, which is sufficient proof of the pudding.

Source : DNAIndia