Cement capacity to remain stagnant
Cement production is expected to remain flat at 70-75 per cent of installed capacity this financial year, according to MP Rawal, Advisor, JK Cement. The industry had a total installed capacity of close to 430 MT (million tonne) a year in the country. Production last year (2016-2017) was about 300 MT, which meant that almost 30 per cent of capacity was unused.
"Our growth depends directly on the construction activity. If it slows down, the cement industry also faces a slowdown," Rawal said. Industry watchers expect this financial year to witness similar demand for cement and resultant production as last year," he says.
"Manufacturers have not made any significant investments primarily due to the auction system-followed by the Government since 2015 for limestone quarries-and a substantial portion of the existing capacity remaining unused," he added.
Rawal said that ready-to-use products were common in Europe. "In India, demand is just picking up. Large infrastructure projects are expected to increase demand for these products. Investments are being made for producing those kind of products."
Slump in cement prices,
India's ambitious plans for housing and infrastructure construction may end a slump in cement prices. Prices are expected to rise as much as 5 per cent in the second half of the year ending March 2018, according to Reliance Securities Ltd. They have dropped 9.4 per cent since a May high after four back-to-back months of decline, Mangesh Bhadang, Research Analyst, Nirmal Bang Equities Pvt, wrote in a research report this month.
India's cement capacity has more than doubled in the past decade though demand has been subdued recently with an existing slump in housing exacerbated by a crackdown on unaccounted-for cash and new legislation to ensure better homebuyer protections. Cement prices are expected to recover as the Government's 'Housing for All' plan gathers pace along with promised spending of $62 billion on railways, airports and roads.
"Demand is expected to see a meaningful improvement due to the low base, good monsoon aiding a pick-up in rural activities and the Government's push in infrastructure and housing segments," said Binod Modi, Research Analyst of Mumbai-based Reliance Securities.
India plans to expand its current highway network by 50 per cent by 2022, which may create 80 million tonne of cement demand, Bloomberg Intelligence analyst Michelle Leung estimated in a report.
That translates to at least 5 per cent growth in demand a year, she wrote. Cement prices have already started improving in some parts of the country and the gains should continue with the end of the annual monsoon season and the start of a string of festivals, said Madhusudan Shah, president of the Cement Stockists and Dealers Association of Bombay. Wholesale prices in the Mumbai region have increased by Rs 25 to 30 per bag in September, he said.
Manufacturers may take advantage of better demand to pass on any further increase in international pet-coke prices, used to fuel kilns, Reliance Securities' Modi said. Pet-coke prices have climbed 20-25 per cent in the past year, he said.
UltraTech Cement Ltd, India's largest cement producer, expects a gradual demand pickup after the monsoons, the company said in an investor's presentation.
Consumption in India's largest state economy of Maharashtra is going to be "good," said Rakesh Singh, Executive President at India Cements Ltd. The previously drought-impacted region has seen good rains, and a substantial chunk of India's planned road construction will take place in the Western state, home to financial capital Mumbai, he said. "Our guess is that post September-October there will be good demand coming out of Maharashtra," Singh said. "Maharashtra will be a high-consuming State."
Care Ratings on cement sector
Cement production in the first quarter saw de-growth of 3.9 per cent. Cement production stood at 72.67 MT in Q1FY17 as against 75.7 MT in Q1 FY 16. Cement production in the country peaked in Q4FY16 at 78.47 MT. For the period April-July 2017, the production has declined by 3.5 per cent to 95.37 MT as against 98.87 MT during the same period last year.
Real estate and housing, which constitutes two-third of the cement consumption, has seen very low inventory addition as claimed by various industry sources. We expect the same to persist as clarity on RERA implementation would continue to evolve during the coming quarters. The newly implemented Act (RERA) along with the regulations and compliances is making developers cautious.
Infrastructure previously contributed for 13 per cent of the total consumption in India. With increased Government spend and low activity in real estate, infrastructure share in cement consumption would inch upwards of 15 per cent during the current fiscal year. Roads and public infrastructure development is expected to push the demand for cement in the two coming quarters.
GST and its impact
GST implemented on July 1, 2017, led to reduction in prices since previous regime taxed cement at 30-31 per cent as against 28 per cent under the GST regime. The same is being passed on to the customers. The wholesale price index shows price change beginning Q1 FY17. We expect weak demand to keep the prices in check at current levels and be range bound for the coming quarters.
Demand is expected to be regional with higher demand from Eastern region followed by Northern. Housing for all, national highways and other public infrastructure would form the backbone for demand in the Eastern region.
In Northern India, Uttar Pradesh, Punjab and Haryana would be the regional growth drivers. Uttar Pradesh and Punjab owing to new Government formation in the first half of the year, would witness infrastructure development push. Favourable monsoons leading to demand in agriculture based rural markets would be another major uptick for cement consumption in the Northern states.
To conclude, ICR expects the cement production to remain subdued in the coming quarter. We see overall recovery starting Q3 FY17. Subdued activity in the real estate segment would impact the overall demand and this would keep the prices and price volatility under check.
With RERA implementation to be completed across all major markets by the end of Q2 FY17 along with clarity on the impact of GST on the realty sector, we expect construction activity to pick up gradually post Q2FY17. Affordable housing and various government-led housing schemes would lead demand recovery for cement from real estate segment.
Infrastructure project implementation, led by Smart City projects across 60 cities and national highway projects, would be major demand drivers in the infrastructure segment. Implementation in the first batch of 20 smart cities has already taken off in stages, and for the remaining 40 smart cities chosen is September 2016. We expect the project implementation to begin Q3 FY17 onwards which should drive the demand for cement.
Demand from other segments, namely industrial segment, would remain subdued while that from commercial segment is expected to remain stable.