From a market perspective, this has been an underwhelming year for the construction industry and materials manufacturers that haven’t found a robust recovery in demand at all.
But even as hopes for any substantial shifts in offtake have been relinquished, cement companies are turning solid financial performance on the back of continually strong pricing, exports pitching in their contribution and costs remaining low. In the third quarter of the fiscal year for instance, combined costs per ton for 16 companies fell 2 percent year on year which together with a growth in revenues per ton of 2 percent resulted in average margins to grow to 29 percent (3QFY24: 26%).
Though prices haven’t shot up recently, in 10MFY25, they are up 18 percent across markets compared to this period last year. The continued increase in prices will ensures companies keep giving returns to their shareholders even when demand is slow to bounce back. In 10M for instance, the total offtake in the domestic markets slid 6 percent. Exports at this point came to save the day, up 29 percent year on year, now pitching 20 percent to the entire sales mix. This is a decent contribution, highest in 9 years, enabling cement companies to keep capacity utilization from slipping below 50 percent. In 10M, capacity utilization is just above that level (51%), down further from last year’s 53 percent.
The industry has not seen this level of utilization in years! In fact, sliding levels of capacity utlization has often triggered a price competition scenario where players will give discounts or reduce prices where companies undercut each other to nab a higher share of the market. Not for the past two years though, where capacity utilization dropped significantly below the average historic average of 76 percent, and yet prices kept surging in harmony with overall inflationary environment.
At this time, there is no pressure for cement companies to reduce prices or offer discounts as most companies are doing well enough financially, and if market insights suggest they should keep hold on prices, it appears to be the right move.
Wherever possible, cement companies will try to maximize their capacity utilization by selling more abroad what they cannot sell locally. As coal prices recede, this is the time for them to maximize their margins and lowering prices will simply not do that.
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