Demonetisation impacts cement industry

Demonetisation impacts cement industry

With majority of cement bags sold at the retail level in cash, new purchases would be hit, analysts say.
Cement sector may witness 15-20 per cent drop in demand after the currency demonetisation and subdued 3 per cent growth in the fourth quarter of this fiscal, a Deutsche Bank Markets Research report said. According to the report, up turn is expected only in FY20 as compared to FY19 earlier. ´We see some infra sector demand offsetting weakness in demand from the housing segment. We may also see a gradual reduction in mortgage rates, which could bring back some genuine demand,´ said
Chockalingam Narayanan, Research Analyst.
He added, ´Looking at the demand-supply model, we expect the regional balance to first shift in favour in Northern and Central India. Eastern India is likely to see the largest reduction in utilisation over the next 12-18 months´ The cement sector is hopeful that infrastructure projects to offset weakness in realty sector. With the government´s balance sheet likely to be in a much better fiscal position, the industry expects a sharp pick-up in infra demand - in line with the government´s vision to push public spending. Currently, only road and railway sector spending is primarily driven by Central Government agencies. State government finances, on the other hand, may come under some pressure, as a good 5-10 per cent of their revenue receipts come from the property sector. To that extent, their infrastructure sector spend on rural roads, urban development projects (metro/mono rail), affordable housing, irrigation, etc may see a dent. ´This is likely to be mitigated if the Central Government passes on a higher proportion of its improved finances to the states,´ the report said. The sector was expecting 55-65 per cent of demand from housing (35-40 per cent rural and 20-25 per cent urban); 17-20 per cent from infra and 25 per cent from institutions and commercial realty. In urban housing, the already subdued levels over the last 3-4 years may be prolonged, but may not necessarily deteriorate, the report said. Commenting on cement prices, Narayanan said,´Following demand volatility, we anticipate a correction in cement prices in the near term. Looking at our cost curve analysis, however, we don´t expect a very sharp drop in cement prices on a sustained basis. Currently, a good 30 per cent of players are not breaking even on a cash cost basis. If this were to take into account, the recent spike in fuel costs of both pet coke and imported coal, at current prices over 43 per cent of the industry would not be at break even. To that extent the room for prices to correct on a sustained basis looks low, he said.

Speaking on demonetisation, Sanjay Ladiwala, Chairman, Cement Stockists & Dealers Association of Bombay, commented, ´November will see a drop of 10 per cent in sales volume. It may continue in December too in case the current cash withdrawal limits don´t change.´ Real estate sector will witness pain due to demonetisation for a longer time than other sectors, said Ladiwala adding that correction in land prices too are expected. However, infrastructure segment is unlikely to be affected, he said. For the cement sector, he said although the sales may not grow at the rate of 5-5.5 per cent as envisaged earlier, it will definitely be higher than last year. However, the demand will be lower till the end of next year, he added.

N. Srinivasan, Vice-Chairman and Managing Director, The India Cements Ltd, commenting on demonetisation, said, ´So far, in the last 15 days, we have not seen fall in sales. It is business as usual for our company. Recently, I went to some markets in Chennai. I met dealers and stockists. As it is their bread and butter business, they are somehow managing the situation. They are also said to be using cheques apart from swipe machines for card payments,´ he pointed out. Asserting that cement consumption won´t go away, he said that cement demand would not be abandoned.´It will get slightly postponed by a few months. Once the liquidity is restored in the system and more new currency notes come into circulation, it will ease the situation in the market and help the trade do business without any hardship,´ he said.

Real estate is generally seen as an industry where cash works and cement as an ingredient in construction is not insulated. With majority of cement bags sold at the retail level in cash, new purchases would be hit, analysts said.

´Cement is an organised sector and there is no problem between suppliers and wholesalers. The problem is at the retail level where customers deal in cash,´ said HM Bangur, Chairman and Managing Director, Shree Cement. According to him, unorganised parts of the construction industry like bricks and sand would be under pressure due to demonetisation.

(Courtesy: The Hindu, Moneycontrol.com)

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