Northern India: rising demand to support prices

A slower rate of new capacity additions coupled with strong demand in north India will improve the business environment enabling higher prices for cement companies such as Shree Cement, JK Cement and JK Lakshmi Cement.

A reduction in oversupply will improve utilisation levels and eventually lead to higher prices. While India will see capacity expansion of more than 80Mt in the next two years, in north India, it will just be 8-10Mt, according to a report in the Economic Times.

Demand growth has been strong over the last two years on the back of higher construction activities. Demand in the region grew by 8% and 11% in FY11 and FY12 against the national growth of 5% and 7%, respectively.

This is expected to continue primarily due to high infrastructural spend in Haryana, Rajasthan and improving political situation in Jammu and Kashimir. The planned addition of 13.5GW hydro power capacity in the 12th Five-Year Plan along with the proposed Delhi-Mumbai Industrial Corridor will also boost demand.

Thanks to a healthy demand and slow capacity addition in the region, utilisation levels are set to increase to 95% from 85% now. A report by Elara Capital shows whenever utilisation levels have topped 95% in the North, EBIDTA margins have strengthened from 15-20% to 35%.

Cement prices have remained subdued in the current quarter but are expected to improve by early next year.

High level of pricing discipline (keeping prices firm despite variation in demand) and the fact that 70% of the region's market is controlled by top five players will help in increasing cement prices in the next few months. This scenario had played out post-2008 (the last upcycle) when prices constantly rose in the North while prices were volatile in other parts of India.