Cement prices could correct up to 3% in fiscal FY24

  • 30 Aug 2023
  • Read 5 mins read

Is it the end of rising prices in cement?

The last 4 years have been great years for cement companies. Cement, recently, completed the fourth successive year of average 4% CAGR growth in price. That had taken cement prices to Rs391 per bag of 50KG, a price not seen in the past. Of course, robust demand was a factor, but too much of capacity under process and a sharp spike in input costs were also reasons for the consistent rise in prices. Since the demand was robust, most of the cement producers could easily pass on the cost hikes to the end consumers without impacting demand. Also, cement supply is still localized so the competition is normally very local than being at a national level.


Thermal costs were a big issue for cement companies

If one looks at the break up of costs for a typical cement company, then power, freight and packaging are important components of the cost structure. Incidentally, all these items had seen a spike. The shortage of power had resulted in a spike in power costs. Supply chain constraints meant more inventory costs for the companies. Also, the spike in crude prices resulted in the transport and freight costs going through the roof. All these factors resulted in a surge in the cost structure of cement companies. The good news, as mentioned before, was that these costs could be easily passed on to the end consumer amidst robust demand for cement.

Now, it is about competition and lower input costs

Two things changed in the recent months. Firstly, the competitive intensity has increased. The big move was made last year when Adani group acquired ACC and Ambuja Cements, making them the second largest cement player in terms of capacity. Only Ultratech has a higher cement manufacturing capacity. The big players are not only in an expansion mode but also undertaking a series of mergers and acquisitions of smaller cement companies to consolidate their position. With more capacity likely to become available in the coming months, the intense competition is likely to pull down prices.

The other factor is that input costs have come down rapidly. Crude costs have come down from $120/bbl to $75/bbl and that has not only reduced freight costs but reduced input cost inflation across the board. Also, timely steps taken by the government has restored near normalcy in power supply to cement companies. Under these circumstances, there is pressure on the cement companies to reverse some of the price hikes of the last couple of years. Falling input costs and commodity prices are also likely to pull down cement prices in FY24.

How much would it add up to?

CRISIL estimates that the overall cut in prices of cement, depending on regional disparities, could be between 1% and 3%. That is not a very substantial cut since demand is likely to remain robust. The fourth quarter of FY24 has already seen a 1% fall in cement prices and that could fall by another 3% in the current fiscal, although any sharp fall from current levels do not look likely. Normally, the cement companies hike prices of cement pre-monsoon. However, this year, there has been no cement price hike and that is indication that downsides are likely in cement prices. Even input costs like Australian coal and pet coke have come down sharply and that needs to be passed on.

Most of the cement companies in India are facing criticism for cartelization and various legal orders are also underway. The cement industry needs to position itself as a responsible sector and cutting prices would be a good way of doing it. Of course, that is assuming that the price of crude does not bounce back due to supply restrictions by OPEC. We have to watch this space!


Content Source: Financial Express