With cement industry growing over 13 per cent in H1FY19, capacity utilisation is picking up pace. But price hikes are still in wait.
After an upward spiral for two months - September and October - by 6.01 per cent and hitting the lifetime peak of 2054.7 points, ET Cement Index, that tracks cement price movements in the country, has hit a pause in November. Though rising cost of inputs have continued to put pressure on the industry bottom lines, cement majors are said to have preferred to boost volumes instead of hiking prices in November, even as strong demand streak continued.
The industry players last hiked prices in the last week of October, boosting the index by 3.18 per cent for that month. In October, the total cement production had hit 28.37 MT posting a growth of 18.4 per cent, which was highest in six months, according to the latest Core Sector Data Analysis by CARE Ratings. 'The favourable base effect (-1.3 per cent growth in October 2017) along with election-led infra push, buoyant rural markets, which led to rural housing construction, boosted the demand for cement,' CARE Ratings said. The Core Sector (including sectors like coal, electricity, fertilisers, mining and steel) posted a growth of 4.8 per cent during the month, with an impetus coming from power, mining and cement - all growing by more than 10 per cent.
'Cement industry (production) witnessed robust growth of 14.4 per cent during first half of 2018-19 (H1FY19) after having witnessed revival during FY18 backed by Government spending on infrastructure,' Madan Sabnavis of CARE Ratings said in an industry update on H1FY19.
During the H1FY19, stable construction activity in residential real estate, increased demand from affordable housing and robust demand from infrastructure segment have ensured cement capacity utilisation improves to 70 per cent,ö CARE Ratings added in the report. Though there was an expectation that the prices would rise after Diwali festivities, it was not to be.
The recently released July-September results by cement companies have thrown up certain trends - though the prices have seen some rise in September and October months input costs were running ahead of realisations of cement companies highlighting the challenge of the necessity of prices catching up in the near future.
Sharp rise in pet coke and fuel costs, a depreciating rupee and muted pricing power in a competitive market are the factors that lead to the challenge. These factors also continue to keep profitability of most of the industry players under check.
Pet coke used to be cheaper than coal, and that was the reason why cement companies were using more of pet coke than coal in order to bring down the cost of production. However, the situation has reversed now forcing the cement manufacturers to change their product mix frequently. While the landed cost of pet coke is at Rs 12,000 per tonne, coal is costing Rs 5,600/tonne, making a lot of difference in the cost of manufacture of cement.
However, the only solace is that volumes are rising across the regions, which is expected to give cement players the much needed pricing power in the coming months so that they can cover their costs more comfortably. The demand strength was reflected in the near double digit growth rates posted by most of the cement companies in H1FY19.
To cite an example, Shree Cement reported 21 per cent rise in revenue to Rs 2,587 crore backed by strong market demand in the eastern region, and higher prices in the northern markets. While it has witnessed 16 per cent growth in volumes in the east, higher prices in the northern region have aided its realisations by 4 per cent quarter-on-quarter and 2 per cent on a year-on-year basis.
Heidelberg Cement achieved 14 per cent revenue growth with only 6 per cent rise in volumes, mostly based on higher realisations from the central region where the company sells about 90-95 per cent of its cement.
Industry majors predict that the momentum will continue in H2 as well and expects a volume growth of 8-10 per cent in FY19. The major threat for volume growth is the liquidity squeeze that may affect the progress of projects in infrastructure and housing segments.
'We are expecting a high double-digit growth this year,' said Shailendra Chouksey, President, Cement Manufacturers Association (CMA) at a conference in November. That is the industry will see double-digit growth after eight years, primarily led by the government's increased spending on big infrastructure projects. These expectations are also based on 13 per cent growth witnessed by the industry in the H1FY19.
The industry with around 60 players has an installed capacity of around 470 Million Tonnes of which 70 per cent of the capacity is being utilised. Thus, capacity utilisation, which was a big challenge for the manufacturers till recently is being tamed to a great extent with major companies, which have acquired existing capacities in the last couple of years, are focusing on improving capacity utilisation rather than resorting to price hikes. Industry leaders like UltraTech Cement, Ambuja Cements and Dalmia Bharat are continuing to operate at 70-75 per cent capacity utilisation, above of the industry average.
The recent state level elections in the northern and central regions have driven implementation of a lot of infrastructure projects, thus raising demend. With general elections in the country a few months away government-funded infrastructure projects will remain the main consumers of cement, besides affordable housing which has gained momentum over the last two years. Given the above scenario, will the industry traversing through a challenging landscape can see an upward cycle coming its way in the near future? Various factors that could influence positive outcomes in the sector seem to be falling in place.
- B.S. SRINIVASALU REDDY