Dec cement surge could last up to May

The stimulus package-driven boost to infrastructure has caused a demand pick-up in the cement sector. However, opinions are divided on whether this demand will sustain or fizzle out before the elections.

Deutsche Bank analysts Manish Saxena, Deepak Agrawala and Sandeep Palgota said their talks with cement marketing companies and dealers suggest that demand has been boosted by state government project restarts including (a) the sewerage line project in Punjab; (b) the national irrigation project in Haryana and Andhra Pradesh; (c) roads, bridges and other infrastructure projects in Gujarat; (d) the concretisation of roads in Delhi; and (e) the Bangalore Metro in Karnataka.

“This seems to be pre-poll demand and is likely to sustain till May,” the Deutsche trio said in a report on January 6.

Some dealers said a few infrastructure projects have restarted as the current commodity prices make them seem profitable to developers. Cement firms, however, are feeling optimistic.

A L Kapur, managing director of Ambuja Cements, said, “After the government package came, demand has picked up and except for the pressure on supply, which we think is temporary, this year should be good.”

Rival Binani Cement is eyeing road and bridge projects in Rajasthan and Gujarat and the Commonwealth Games. Vinod Juneja, MD, said the government has started spending real money from the stimulus package and has identified projects that will be taken up. “In the next two months, we expect demand to revive rapidly and continue over the long term,” he said.

However, a senior member of the Cement Stockists & Dealers Association of Bombay wasn’t ready to celebrate just yet. “We foresee sustained growth in demand till May but what happens after monsoons we can’t tell now,” he said, requesting he not be named.

Cement despatches in the December 2008 quarter grew 12-14% year-on-year. But Morgan Stanley analysts M Bhadang and A Soni were not impressed. “The government has announced various measures for the cement industry but we believe these measures are not sufficient to increase demand and control pricing when supply hits the market,” they said in a note on Monday.

They said the strong volume growth shown by the top four cement companies is a ‘blip’ and unlikely to sustain over a longer period.

“…Higher demand doesn’t mean end of problems for cement firms. Supply is a greater problem for the industry than demand at the moment…,” Bhadang and Soni said.