Why are cement prices declining in India? MC explains

Except for states in western India, all other regions saw cement prices decline in the range of 0.6 percent to 6.5 percent as of March 31 from a year earlier.

After a price hike in October, Indian cement makers faced a significant downturn in the last part of FY24. Heightened competition and expansion in capacity triggered a Rs 40-Rs 45 drop in prices per 50 kg bag across the country over the five months through March 31, according to a CRISIL analysis.

Except for states in western India, all other regions saw cement prices decline in the range of 0.6 percent to 6.5 percent as of March 31 from a year earlier, according to region-wise pricing data published by brokerage Prabhudas Lilladher. However, analysts said softer input costs are aiding companies, offsetting the impact of lower prices.

MC lists the factors that triggered the sharp decline in cement prices.

Which are the regions facing the sharpest price decline? 

Demand is slow in the eastern market due to tightness in the money market. Payments from state governments are slow. Supply is greater than demand, analyst Tushar Chaudhari of Prabhudas Lilladher said in his note earlier in the month. Prices in the market fell 6.5 percent to Rs 316 a bag from Rs 338 in March 2023. In a note last week, Elara Capital said that attempts to raise prices by up to Rs 40 per bag in early April were unsuccessful, with companies forced to partially roll them back.

In April, cement prices across central and north India showed a mixed trend. Prices remained little changed month on month in Madhya Pradesh and east Uttar Pradesh, while western Uttar Pradesh saw a dip of Rs 10 per bag. In north India, prices in Punjab and Delhi declined by Rs 5-10 per bag. But in Rajasthan prices rose Rs 5 per bag, according to Elara Capital.

What are the factors contributing to the decline? 

This fall is primarily due to weak demand. According to analysts, several factors have led to weak demand, such as increasing temperatures, the ongoing general election, labour shortages, liquidity problems and in certain regions, challenges related to the availability of sand and water needed for construction.

An aggressive focus on volumes at the expense of pricing resulted in an about 6 percent sequential decline in cement prices to Rs 370-375 on average per 50 kg bag in the fourth quarter, with prices in March at Rs 360-362 per bag, CRISIL said in its report.

"Heightened competitive intensity due to the entry of new players, 40-42 MT (million tonnes) of capacity additions and benign cost pressures catalysed the cement price correction in fiscal 2024 after four consecutive years of price rise at a CAGR (compound annual growth rate) of about 4 percent from fiscal 2020 to fiscal 2023," said Sehul Bhatt, director, research, CRISIL Market Intelligence and Analytics.

What is the expectation on demand in the coming months?

Analysts are optimistic about a pick-up in construction activity before the onset of the monsoon, with significant demand coming from the housing sector. "There may be a short-term pause around the election period, and on account of monsoon, we anticipate the current prices to moderate in the near term," said Vincent KA of Geojit Financial Services.

Although sustaining price hikes remains a concern, analysts believe lower fuel prices and the focus of most cement firms on cost-saving measures may offset any major negative impact from unfavourable cement prices.

How are companies navigating declining prices?

Cement makers are able to cope thanks to subdued costs of fuel such as petcoke and coal, which constitute their second highest expense component. Companies are focused on expansion activities and banking on lower input costs to support margins.

"Players have not thought about price increases because of softened input prices; their profits are getting delivered," UltraTech chief financial officer Atul Daga said in post-earnings call on April 29.

Most companies are also adopting green energy with significant investments in waste heat recovery systems and solar-based power plants for their energy requirement, which is expected to reduce energy costs. UltraTech expects 150 MW of waste heat recovery systems to get commissioned in the next two years.