As per data from Central Statistical Organisation, the production of asbestos cement sheets grew by 13% to 2.16 lakh tonnes in April 2010. But the production recorded y-o-y fall of 1.0%, 0.6%, 22.1%, 14.3% and 21.4% in May, June, July, August and September 2010. After such y-o-y fall for five months in succession, the industry resumed marginal 0.8% growth in October 2010.

As per industry sources, the good South West monsoons impacted the sales in the quarter ended September 2010. But, contrary their expectations, the growth momentum are not upto the mark in the current fiscal sofar. As a result, though the prices of inputs including cement have hardened, the players are not able to adequately pass on the rise in costs through hike in asbestos cement sheet prices. This is set to worsen the margins of the players, in the midst of accelerating costs, sluggish demand and moderate increase in selling prices.

WPI

The wholesale price index (WPI) of the asbestos cement corrugated sheets increased from 117 in January 2010 to 118 in February 2010, and leaped to 125.50 in March 2010. They eased to 125.40 in April 2010, and remained at that level through November 2010. On a y-o-y basis, WPI of asbestos cement corrugated sheets were 5.7% higher in the quarter ended September 2010, 6% and 6.5% higher to 125.4 during the months of October and November 2010 respectively.

Players find it difficult to rise prices, despite spike in costs

As the monsoon season had come to an end in the country, the demand for cement products was expected to shoot up as the construction and infrastructure activity abates. Typically the last quarter ending March and the first quarter ending June, in a fiscal year witness good demand. Accordingly, players were expecting rebound in demand after the end of South West Monsoons (which runs through September 2010). Contrary to the expectations, the demand growth has been sluggish in October and November 2010, leading to crash in margins of the players amidst rise in cost of inputs like cement etc.

Visaka industries and other cement product manufacturers had marginally increased prices for cement products like asbestos cement corrugated sheets during the months of October and November 2010, but these hikes were very moderate and not sufficient enough to take care of the incremental cost build up since April 2010. The players are reconciled not to significantly hike prices in December 2010 too, considering intense competition on the one hand, and sluggish demand on the other.

Mergers & Acquisitions

Hyderabad Industries Limited has executed a lease deed for taking over of a fiber cement sheets manufacturing facility situated at Saidpura, Dera Bassi, Punjab, with a capacity of 45,000MT per annum. On acquisition, this unit shall cater to the needs of the growing fiber cement sheets market in the state of Punjab and its adjacent states and facilitate the company to increase its market share.

Asbestos cement sheets are primarily used as roofing material in rural and semi urban housing, and also for general industries and by the poultry sector. The industry banks heavily on the rural sector, where about 80 to 85% of the rural people use thatched roof / tiles for shelter. Considering the fact that the thatched roof needs regular replacement and tiled roof need continued maintenance, the rural people's first choice will be to replace the roof with affordable and relatively durable asbestos cement sheets, as and when their economic conditions improve. So, there is tremendous scope for demand growth of asbestos cement sheets. The current context of improving rural income adds further cream. But expecting such strong growth in demand, players have aggressively added capacities.

Contrary to industry's expectations, the rural demand growth was below expectations throughout the current fiscal sofar. On the one hand, the players had to incur higher costs on account of increase in input costs, and on the other, they had to incur higher fixed costs on the enhanced capacities. This coupled with sluggish demand growth meant erosion in margins.

But the players are unfazed. The strong growth in the economy, with improvement in rural income as well as increasing loan availability to rural masses through banks, micro finance institutions etc. The NREGS has also boosted rural income. So, the players feel that the current sluggishness is an aberration, and will leave way for improved growth, especially from the quarter ending March 2011.

Meanwhile, the sharp appreciation of rupee has moderated the rise in landed cost of asbestos fibres. Though cement prices have hardened, considering over capacity situation, the cement producers may not be able significantly increase prices from current levels, even during busy construction season of Jan-June 2011. Depending on the competition scenario and demand growth, they will also attempt further increase in prices. So, with relatively moderate input prices, and strong demand, the players are hopeful of sequential increase in margins in the quarter ending March 2011.

Outlook

All cement product producers have embarked related diversification to other building products, besides unrelated presence in textiles by Ramco Industries and Visaka Industries. There is some cushion in such diversification, as the margins in those business improve with better offtake / improving business prospects.

The core asbestos cement sheet sector's margins have fallen in the current quarter ending December 2010, contrary to the industry's earlier expectations. Now, the players look forward to improvement in demand from the quarter ending March 2011 through the quarter ending June 2011, before the South West Monsoons 2011 sets in.