For India, cement production capacity stood at 502 million tonnes per year (MTPA) in 2018. According to inputs from credit rating agency ICRA, around 18-20 MTPA capacity may be added to the industry in FY 20. The country is the second largest producer of cement that accounts for over 8% of the global installed capacity.
However, the Indian cement industry is currently under pressure. A report by CRISIL states that the growth in the Indian cement industry is expected to slow down in FY 20.
Low on score board
The CRISIL report published in September, 2019 evaluating the half yearly performance of the sector stated, “Cement demand is expected to grow at a slower rate of 4.5-5.5% in FY 20 after witnessing robust growth of 12% and 9%, registered in the past two fiscals.”
The demand for cement in this fiscal is expected to shrink largely due to lower spending by the government. As an addition to this factor, Pradeep Purohit, Senior Vice President, Star Cement, told BE, “The real estate sector is still under tremendous pressure due to inventory pile up and other regulatory issues.” This is impacting the cement industry negatively.
The CRISIL report said, “Demand growth will bear the brunt of weak government spending in the first half which contributes to nearly 35-40% of cement demand and liquidity crunch impacting the real estate market which consumes 5-8% of cement demand.” The all India demand for cement also fell by 2% in the Q1 of FY 20 with east and north India recording a fall of 5% and 1.5%, respectively.
Purohit, however, denied any significant slowdown in the demand and said, “Most of it was cyclical and seasonal reduction in demand.” Speaking on the company’s productivity, Purohit added, “We are able to work at full capacity utilisation and beyond due to our strong brand acceptance and top of mind recall. We are in process of expanding our capacity through a Greenfield project of 2 MT capacity being installed in north Bengal.”
The cement industry is also under stress due limited scope of exports. Purohit added, “Bangladesh and Nepal have such duty structures that cement exports are not viable at a large scale. Bhutan has its own cement production and already exporting its surplus to India. The Indian cement industry can only export cement clinker. We are regularly exporting to Nepal and Bhutan but again Bangladesh which is a big importer of clinker, is out of bounds due poor logistics and high cost of transportation.”
The cement industry is pegged to reach a production capacity of over 550-600 MTPA by 2025. However, to reach that mark, the industry would require over 51 MT of coal, which is a tall task, given the present situation. Attaining an ensured supply of coal is pivotal for the growth of the cement sector.
Cement companies increased prices in the last quarter of 2018 and in the first quarter of 2019. However, in south India the prices dropped in June due to a slowdown in demand. Later prices also fell in eastern and western parts of India.
Decline in input costs which include a drop in prices of coal and pet coke by 13.5% on a year-on-year (Y-o-Y) basis made things easier for the industry. The third quarter of the current fiscal is also expecting lower power and fuel expenses. Given the present situation, if the industry can put a stable price chart, it can see a northward turn in future. According to CRISIL, the profit margin for the sector would be at a six-year high on account of recent price hikes undertaken by the industry in April-June quarter for the next fiscal.
Around 22 lakh housing units are being constructed under Pradhan Mantri Awas Yojana (PMAY)-Urban. The government has set a target of 60 lakh units under PMAY-Gramin for FY 2020. Such focused attention to housing development is bound to give a fillip to the cement industry. According to the CRISIL report, “Demand growth is expected to inch up to 6-7% CAGR over a five-year period led by pick up in affordable housing, rise in government spending on infrastructure activities and healthy rural housing demand.” PMAY-Gramin for FY 2020 alone will demand 80-85 MT of cement.