Cement - Monsoon blues set in news india cement market industry

Cement - Monsoon blues set in (updated - 15 June 2010)
While the economy looks forward to a favourable monsoon, its onset will not be so exciting for the cement sector. As construction activity takes a backseat, the cyclical fall in demand is expected. All-India dispatches in May grew at a lower rate of eight per cent year-on-year. The rate has moderated over the past few months from the 10 per cent rate in FY10. Capacity utilisation rates also declined to 82 per cent from 88 per cent the previous year.

A 16-million-tonne capacity addition in the last 12 months, especially in South India, has created a drag. According to analysts at HSBC Global Research, poor demand growth was primarily due to a slowdown in government spending on irrigation and housing projects in Andhra Pradesh, which is the major consuming state in the south. Capacity utilisation rates remain muted at 70 per cent, down from 79 percent ayear earlier, the lowest amongst all regions. However, the long-term demand story remains intact and the reversal is likely in the next nine months, driven by strong domestic consumption. Analysts indicate towards a compounded demand growth of 12 per cent over 2011-13. A pick-up in infrastructure spending is expected to spur demand, as its share is expected to rise from 18 per cent in the earlier years to around 24 per cent. However, capacity expansion will place a lid on profitability.

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Pricing power, along with ability to control input cost, will be the key for cement makers. Analysts anticipate an input cost rise, especially in coking coal. The south Indian cement manufacturers are expected to see constant pressure on pricing due to increased competition and muted demand (in the short term).

With a wider geographical reach, companies like Ultratech, ACC and Ambuja Cements will be able to weather the temporary bad weather. The possible good news is that the sector has already underperformed the market and the valuations have little downside.
source - businessstandard