But this volume growth was only partially reflected in the bottomline with sluggish prices playing spoilsport.

Unlike earlier years, the trend was visible across all regional markets. Prices shot up by 30 per cent to 66 per cent in different markets. Earnings levels showed a sharp spurt despite lower volumes.

The higher level of prices continued for a short period from 2000-01. But these were clearly unsustainable in a market devoid of any price ramping arrangements. The demand-supply balance was also too much in favour of the latter to let such price trends continue.

In many key markets such as Tamil Nadu, Maharashtra and Delhi, average prices have been lower than the preceding year as well as long-term average levels.

Quite a few regional players such as Chettinad Cement and India Cements have ended deep in the red. Gujarat Ambuja, Grasim, Shree Cement and OCL are the only ones to report healthy earnings numbers aided by higher efficiencies and/or localised stable trends in prices.

The industry clearly depends on higher prices to deliver better profitability.

Prices have, on an average, not kept apace with increase in costs in the last five years. In key markets such as Chennai, Mumbai, Delhi, Hyderabad and Kolkata, the current cement prices levels are almost close to the five-yea average prices.

Over-capacity strikes

The cement industry is struggling to live down the effects of a rash of capacity creation in the second half of the 1990s. Even in the last three years, close to 30 million tonnes have been added. This has lifted the overall capacity levels to about 144 million tonnes. As a result, good volume growth in three of the preceding four years is yet to have a favourable impact on pricing power in the hands of producers.

Barring the eastern market, in the last one year, the other markets continue to be dogged by excess supply.

The ramp-up in capacity in the last couple of years has come at a time when major players such as Gujarat Ambuja and Grasim were insisting on emergence of better demand balance and pricing power in the hands of the producers.

But the Gujarat Ambuja-ACC combine has commissioned five million tonnes of capacity. To capture market share and ensure optimum capacity utilisation, the twosome — especially Gujarat Ambuja — has pushed its products aggressively in Maharashtra. This is where the new units are located.

Gujarat Ambuja has, for instance, ended the January-March 2003 quarter with a 36 per cent rise in volumes.

The aggressive push initially had an adverse effect on prices in markets such as Mumbai and Pune, among others. In the last couple of months, however, prices have recovered some lost ground. But they still prevail more or less close to levels of a year ago. The south is another market where over-capacity has been a rampant problem. The commissioning of new capacities by the likes of L&T, Madras Cement, India Cements and Grasim has led to a sharp capacity build-up. Sluggish growth in the Tamil Nadu and Kerala markets, compared to the industry average, has also added to the problems of rapid capacity creation.

The inevitable effect has been on prices in these two markets, which once used to be islands of prosperity with prices staying way ahead of levels in other markets. Only in the last two months have prices been pushed up in Tamil Nadu.

Much of the increase would accrue to the State government due to the two-tier sales tax structure in place. Tax imposts move by 43.2 per cent if price of a cement bag crosses Rs 135.

The silver lining

Two factors could bring out a better balance between demand and supply and improve pricing levels in a sustainable manner in the next year or two.

One, the volume growth in the last four years has narrowed the gap despite the hiccups in 2000-01. In 2002-03, production was at 110 million tonnes, implying an utilisation rate of 80 per cent.

But for the 22 per cent growth in 1999-2000 and the close to 10 per cent growth in 2002-03 on a healthy base, supply would have outstripped demand by a much larger margin.

If the industry gets one or two more years of volume growth of close to 10 per cent, the over-supply situation would get corrected.

The second factor at play is the emergence of better discipline in capacity creation. The four major players — Gujarat Ambuja-ACC, Grasim-L&T, Madras Cement and Zuari-Italcementi — may between themselves add about four million tonnes over the next couple of years.

Notably, Gujarat Ambuja has shelved plans for a two-million tonne unit in Andhra Pradesh.

None of the others is in a position to add capacities. India Cements is in a debt bind that would stifle its growth. Shree Cements has only in the last 18 months raised capacity by 1 million tonnes.

Quite a few are in selling mode (see accompanying story) desperately awaiting buyers.

Two years of poor profitability and cash flows have also done enough damage to any capacity creation plans.

The consolidation underway — with the Grasim-L&T and Gujarat Ambuja-ACC combines controlling close to 45 per cent of capacity — would also act as a deterrent. Financing would also be hard to come by except for these two major groups, Madras Cement, Lafarge and Zuari-Italcementi.

A better alignment between likely demand growth and capacity creation can be expected over the next three to five years. This is bound to improve pricing power and profitability, especially for the major players.

The ones to watch would be Gujarat Ambuja, Madras Cement and Grasim. ACC and L&T may become part of a restructuring exercise over the long term and, in isolation, carry risks associated with any such exercise.

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