"In the current scenario of excess supply, manufacturers have tried to hold prices through informal arrangements," notes the report, the cap on prices being the freight cost from the nearest supplying market. "However, whether this approach will be able to keep prices at high levels is questionable," says the report.

"In fact in Tamil Nadu, individual members, driven by the need to protect their own interests, have begun cutting prices in order to push volumes, leading to price wars in a given area," says the report.

Such a cap is possible as prices of cement are more influenced by supply, which is within the control of the supplier, than demand for cement, which is relatively price inelastic.

Domestic demand for cement is expected to grow at seven per centin 1998-99 and 8.4 per cent in 2000, The report says this will not be adequate to match the rapid increase in supply. A turnaround can be expected after the financial year 1999-2000, when the equilibrium between demand and supply is attained.

Prices of cement declined by five to 10 per cent in 1997-98. Given the adverse demand supply situation prevailing in most markets, prices are likely to remain under pressure in 1998-99. The recent increase in prices in some regions can be attributed to informal agreements entered into by manufacturers to hold prices high through production cuts. However, the merchant bank expects this arrangement to be unsustainable.

The Asian crisis and the resultant fall in export realisatoins has led to a decline in exports. In April to September 1997-98 exports declined by 17 per cent over the same period last year. Most of this supply will find its way into an already surplus domestic market putting a downward pressure on prices.

While no significant increase in capacity isexpected in the next two years due to low industry profitability and insufficient demand, increase in supply will be through improved capacity utilisations. "We expect supply to increase by 11 per cent 85 million tonnes to 1998-99."

Consolidation in the industry, which is already under way, will gain momentum, said the report. Large players with economies of scale will capture larger market-share or enter new markets resulting in better efficiencies and pricing power for the surviving players, says the report.

The steep increase in prices of inputs witnessed in the last two years has resulted in their substitution-grid power by captive power, domestic coal by imported coal, and rail by road, points out the report. Similar price hikes are not anticipated in the future, says the report. Cement stock valuations being largely dependent on earnings were trading at a discount to the market in 1997-98, says the report.

The SBI Caps cement index declined by 22 per cent as against a 16 per cent fall in theSensex. "With supply exceeding a sluggish demand, we expect the sector to underperform in the current fiscal," says the report.