Cement prices continue to soar

A growth of 3.54 per cent YoY in cement volumes during 5MFY12 may not get the investors too excited. However, 38-39 per cent YoY jump in net retention prices in FY12 (YTD) and an approximate eight to nine per cent QoQ rise in 2QFY12 is a comforting factor for the sector. Interestingly, and contrary to general expectations, high cement prices have maintained their level in the winter season as well. Another silver lining for the sector has been recent correction in coal prices (down 10 per cent since September 30, 2011) which is likely to help loosen cost pressures, thus boosting margins.
Cement prices refuse to give an inch: Despite the winter chills setting in we have not seen cement prices nudge southwards. In the past, owing to slowdown in construction activity in winters, stronger competition tends to emerge within the sector which had consequently led to a dip in cement prices. However, during this year (2QFY12) and last year (2QFY11), the trend has reversed and prices have risen in order to counter the weak demand. Considering this weak demand outlook (JS estimates five to six per cent YoY growth in FY12), we believe prices are likely to stay relatively strong to sustain profitability of the sector, said Furqan Ayub at JS.
Short term weakness in coal prices: Since September 30, 2011, coal prices have plunged 10 per cent to FOB $102.2 per tonne (Richards Bay Index). This is unusual, since historically coal prices have surged in the winters due to increased demand. This time though, the deteriorating economic conditions in Europe and US coupled with retrenching developing market growth has led to a slide in coal prices. Nonetheless, due to supply tightness, increased reliance on thermal power generation and strong industrial growth in China, the general consensus amongst the international analyst community is for coal to remain firm with an upward bias in the long run.
However, this short term weakness in coal bodes well for the domestic cement sector. In the table below, we have done a sensitivity analysis for both LUCK and DGKC’s earnings to coal prices, he added. Outlook: He further said that we believe high cement prices and contained coal prices are triggers that have gone somewhat unnoticed amid the weak sentiment prevailing in the market. Even if coal prices take a U-turn from here, cement prices are firm enough to sustain healthy margins.