Cement Stocks – What exactly is driving Indian cement stocks to 52-week highs

cement Cement Stocks   What exactly is driving Indian cement stocks to 52 week highs

One sector that quietly outperformed in the last few months has been cement. Most of the large cement companies like Ultratech and Shree Cements trade near their 52-week highs. In fact, Ultratech has rallied 77% in the last 6 months and its market value scaled the Rs.2 trillion mark. Even erstwhile leaders like ACC and Ambuja as well as smaller cement companies are not too far behind. What exactly is driving cement stocks higher and what does it augur for the future?

A veritable demand story

The largest chunk of cement demand comes from residential and commercial construction activity. In the last few months, a massive infrastructure spends by the government has been boosting cement demand. However, demand for cement is also picking up from builders who are keen to start new projects or to, at least, complete existing projects. But the story may be more regional.

The sharp spurt in demand and a supply lag has led to a sharp rise in prices. In the month of February, most of the cement companies in South India hiked cement prices by 8% or nearly Rs.30 per bag. The cement price hike was also quite steep in the East despite major capacities coming up. However, price hikes were more subdued in the North, West, and Central regions. The price hikes have been able to compensate the cement manufacturers for the sharp spike in input costs in the last year.

Passing on the input spike

One thing that hit cement companies in the last one year was the sharp spike in input costs. Fuel accounts for nearly 15% of the cost of cement manufacture. In the last one year, cost of diesel is up by 35% in line with global crude prices. Petcoke, another important input, has seen price increases of 60-70% in the last one year. Same has been the case with coal also. Apart from these clear cost-push factors, there has also been a spike in freight costs due to the fuel price hike. The movement of cement is an expensive affair and higher fuel costs only add to the problem. The ability to pass on input costs has been a major boost for cement stocks. However, it is not clear if this trend will continue.

Bargaining power shifts

Analysts argue that if the input costs are passed on, the net benefit to the cement manufacturer is very limited. But that risks missing the most important aspect of the cement industry. Historically, it has been seen that cement companies have done well only when the bargaining power of pricing has shifted from the consumer to the producer. That is the time, cement companies have given the best shareholder returns. Otherwise, there is not much to really highlight in a pure commodity play. After a very long gap, that bargaining and pricing power looks to be returning to cement. That is what cement stocks are celebrating!

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