Poor offtake consequent to the economic slow down and substantial creation of fresh capacities resulted in prices crashing in most parts of the country. The companies were unable to pass on the increased cost of inputs and the profits were depressed. Since April this year, cement scenario began to look up and despatches during the period April-July shot up by 21.28 per cent. South saw a 18.32 per cent growth in offtake during April-June with July maintaining the same trend.

Having forced to take a hit during the lean period, cement companies began to jack up prices once the demand began to improve. Since May, manufacturers in South have been increasing the prices regularly. According to the companies, these hikes enabledthem to recover the costs and meet their commitments. Having successfully moved the price from Rs 140-150 levels to Rs 180 levels, they now set their sight on Rs 200, a historically high price since decontrol.

Earlier attempts by the companies to shore up prices failed on account of two reasons. Firstly, there was no real demand then and the companies tried to stimulate demand by cutting supplies. Secondly, the unity among the companies lasted only till prices reached a reasonable level after which one began to undercut the other leading to a full scale price war.

This time around the demand is real and undercutting is unlikely as most cement companies are desperately in need of cash flows. L&T is in the midst of a restructuring and it is imperative that the cement division shows an improved performance. India Cements is in the process of stabilising after acquiring substantial capacities and increased cash flow will go a long way in reducing its interest liability. Madras Cements and Chettinad Cementshave also announced expansion plans.

The move by the companies is also a case of `make hay while the sun shines'. North-East monsoon will set in September when consumption in Tamil Nadu will decline. Moreover, a significant portion of the current demand, especially in Andhra Pradesh, is from infrastructure which has been given a fillip on account of elections. Many of these projects are slated for completion around the election time and after which the consumption is not expected to be the same. These factors are expected to put a downward pressure on the prices in September-October. If the prices are taken to Rs 200 level by then, even a Rs 20 per bag decline would only bring the price to Rs 180 levels.

Though this frequent price increase is causing problems to wholesalers and retailers as they find it increasingly difficult to explain the hike to the people, the companies are in no mood to let go the opportunity. A Rs 7 per bag hike is slated for middle of this month followed by a similar hike in thethird or fourth week.

Insight: Gujarat Ambuja may move southward

The frequent price hikes may prompt Gujarat Ambuja to get active in the Kerala market though it is a marginal player in that state. It already has plans to set up a packaging unit at Tuticorin in TN and here again the size is not material but the impact on margins will be positive as it is the lowest cost producer and net of freight it will get at least Rs 25 per bag higher than what it gets in Gujarat. It already has the highest margin in the industry and hence even minor improvements in margins matter. The India Cements stock should see a bull run because of the low price at which it is available. Madras Cements, being the lowest cost producer in the south and the second lowest cost producer in the country, should also benefit.

--Urmik Chhaya