Cement cos see revival in demand

By Ramnath Subbu

MUMBAI, DEC. 2. The cement industry which has been plagued by various problems in the recent past, has been exhibiting some signs of a recovery. Cement prices across major markets shot up and in the western region, particularly in Mumbai, manufacturers reportedly hiked prices by about 30 per cent over the last two weeks. Mumbai prices which were around Rs. 125-130 in the last few months, reportedly moved up to around Rs. 170 a bag in the last fortnight. Mumbai is the largest market for cement with a monthly consumption of around three lakh tonnes. Markets in the North and the East have also evinced keenness to hike prices by Rs. 15-20 a bag. This is in line with manufacturers in the South who have, in Tamil Nadu and Kerala, been able to maintain prices at Rs. 170-180 a bag.

Cement despatches have been improving in the current year and from the beginning of the year in April 2000 at 8.04 million tonnes, to a high of 8.97 million tonnes in June, it had fallen to 6.63 million tonnes in August. However, since then it improved to 7.03 million tonnes in September and 7.79 million tonnes in October. Despatches are expected to continue to be good in December with November having recorded good growth.

According to a senior industry source, ``Prices have no doubt firmed up but it is nowhere near the figures of four years ago. With increasing input costs and the pressure of competition, what is the harm if prices are revised to more realistic levels? Already a clutch of companies have slipped into the red. Cement is after all, a decontrolled item and companies have to ensure that returns are commensurate with rising input costs. Cement is price inelastic and is essential in the construction industry.''

Market players feel that a demand recovery could be round the corner. The current situation is supply overhang which is also the reason that players had announced production cuts earlier. Cement units decided to shut down for 60 days annually instead of 25 days. While there have been various reactions against this, industry sources feel this is a common global phenomenon.

During the year, cement companies' profitability took a hit owing to lower prices, high input costs and falling demand.

The industry, as it is, has been hit by a combination of factors including lower volume growth against the previous year and unremunerative prices (considering higher input costs such as petroleum). Volume growth is not likely to be more than 6-7 per cent in the current year.

Companies are confident that the second half of the year would be considerably better. Many have been in the midst of either augmenting capacities or realigning their businesses. Last year, through its 60 per cent owned subsidiary, Ambuja Cement India (ACIL), Gujarat Ambuja Cements (GACL) acquired over 11 per cent equity stake in Associated Cement Companies (ACC). GACL also acquired over 42 per cent stake in Ambuja Cement Rajasthan (ACRL, formerly DLF Cements). It transferred its investment in Ambuja Cement Eastern (ACEL) to ACIL at a profit of Rs. 249 crores. Moreover, the Ambuja group has embarked on a major capacity expansion at both GACL and ACIL. The two companies have commenced work on greenfield projects of two million tonne cement plants each and in addition, the group is in the process of setting up captive power plant and grinding facilities.

L & T is to list its cement subsidiary and also offer an equal stake in the subsidiary to a financial/strategic partner. The board has approved the demerger of its cement business into a separate subsidiary - L&T Cement Ltd (LTCL) - which will be a listed company. As part of the demerger proposal, the shareholders of L&T will receive shares in LTCL which will be around 25 per cent of the share capital of LTCL. The company will also consider merging L&T's subsidiary Narmada Cement Company with LTCL. L&T will offer 19 per cent of its stake in L&T Cement (LTCL) to a strategic / financial partner over the next three years and the partner can also acquire an additional 13 per cent (from the secondary market) from L&T shareholders who will be given 25 per cent of LTCL share capital. The strategic partners are to bring in money to expand capacity from 16 million tonnes to 30 million tonnes and will consequently take their shareholding in LTCL to about 42-44 per cent over the next three years.

Grasim Industries, in a move to rationalise operations, is to merge its wholly owned subsidiary, Dharani Cements, with itself. The company has a capital expenditure plan of Rs. 253 crores for two-year period ending March 31, 2002. For this fiscal, the capex is Rs. 190 crores out of which Rs. 120 crores will be the debt portion and has been tied up. This is being used for setting up the grinding plant at Bhatinda, four ready-mix concrete (RMC) plants and debottlenecking of its cement plants. The debottlenecking will add 1.6 million tonnes additional capacity to the company's existing 11 million tonnes. Grasim's focus will be on its core markets, which are the Western corridor, Kerala and Tamil Nadu.

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