Demand down but margins strong
Demand down but margins strong

Demand down but margins strong

The cement sector, which was already impacted by the general economic slowdown in FY 20, has now been severely hit by the COVID-19 pandemic-induced demand slump in the industry. According to most observers, cement production in the country is set to fall sharply by 25 to 30 per cent during FY21 and capacity utilisation is likely to be around 40 to 45 per cent. This will be the steepest ever fall in production and capacity utilisation that the industry has ever witnessed, according to a report by rating agency CARE Ratings. As we know, cement can hardly be exported or even stored for long. It follows that cement production trends usually move closely in-line with ups and downs in demand. Demand is also poised to fall sharply, given the lockdown related restrictions present in various degrees as the run of the virus is showing no signs of abating in India.

Most of us are now speculating about the recovery timelines -does the rebound happen in third quarter or fourth quarter? Or, do we have to wait till the onset of next financial year for things to start turning around? A number of uncertainties cloud these projections, such as intensity of monsoon, lifting of lockdown, further stimulus/incentives, fiscal/lending policies, etc. Of these variables, monsoon has certainly not disappointed, raising hopes of a quicker demand growth, at least as far as rural consumption of cement is concerned. We are, however, not that hopeful about the other segments of demand (like infrastructure projects and organised urban housing) firming up so soon.

So, it is a situation with mixed prospects. Faced with dwindling demand and erosion of top line, cement companies concentrated on managing their input/logistic costs, to shore up their profitability and protect their profits, and in this strategy they seem to have largely succeeded in the last quarter as we can see in the quarterly financial results of the sector. This is indicative of the resilience of the industry and its ability to deal with adversity. But the even better news to come, is that commencement of recovery may come sooner than expected.

Morgan Stanley has published an analysis titled "Rebuilding India after COVID-19" just a few days back which is very timely, relevant and current. Based on positive trends seen in sale of tractors and fertilisers, the report suggests that our economy will bounce back driven by rural demand. Status of monsoon, area under kharif cultivation and increased government spending in rural areas, all combine to help create a potentially conducive rural economy in the immediate aftermath of COVID-19 pandemic. We expect all these factors to promote a healthy increase in rural consumption of all consumer items, including cement. Based on such numbers, the report predicts a base case of cyclical recovery in the coming quarters, driven by rural demand and to some extent by industrial exports.

Let us hope that in the later part of the year, the cement industry will be supported by positive demand growth in villages, in addition to the industry's internal measures of cost management.

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