Thursday, August 30, 2012

STEEL & CEMENT: Q1 RESULTS ANALYSIS

Despite the obvious rationale going against it, steel and cement players in India have had a markedly subdued first quarter. Virat Bahri of B&E analyses the dynamics behind the numbers

The causes for oversupply are two-fold. Firstly, there has been a capacity addition of at least 60 mtpa since the past two years but demand isn’t growing at the same pace. Rakesh Singh, Joint President, Marketing Head, India Cements, comments to B&E: “Capacity has been increased by 12-13%, but demand has increased by only around 7% y-o-y.” Industry observers point out that these capacity additions were done with a 2-3 year time frame in mind. Prices in May were down by 3.8% (Mumbai) to 14.3% (Hyderabad) y-o-y in different regions (Angel Broking-CMA research). Markets of South and West India were particularly impacted by sluggish growth, lower offtake and shortage of wagons. The monsoon effect is visible here too, and is likely to last till September. But for companies relying on the southern market, oversupply may persist for at least two years. Raw material costs will also continue to pester players. In Q4 2010-11, raw material costs are expected to grow (y-o-y) by 34.11% for Ultratech, 4% for India Cements and 25.4% for J. K. Lakshmi Cement (Jaypee Capital).

Jinal Joshi, an analyst with Jaypee Capital, feels the prospect of cartelisation cannot be ruled out in such situations. It is possible that players create artificial scarcity to push up the prices. The Builder’s Association of India, however, has alleged that this has already happened in the April-June period, citing price increases in certain regions. But the Cement Manufacturer’s Association refutes the claim, saying that prices have actually been falling.

From a 2-3 year perspective, the tidings are pleasant for both steel and cement. India is reaching the close of the 11th Five Year Plan and infrastructure spending is expected to double in the 12th five year plan. At that time, players of both segments should see the pricing game move more convincingly in their favour.



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