India is the second largest producer of cement in the world after China, having the effective production capacity of around 475MTPA as of FY19. By 2022, the production of cement is expected to reach 540MTPA. From FY12-19, cement consumption grew by 5.3% CAGR where production increased at CAGR of 5.7% during the same period. In last ten years, cement manufacturing capacity has more than doubled which is mainly due to strong demand the industry had experienced till FY 2012 which in turn had helped the cement manufacturers with abundant cash flow and strong balance sheet.
The relationship between GDP and cement consumption shows that for every 1x growth in GDP the cement volume is expected to grow by 1.1 times. On demand front, Housing Sector contributes 68% of the demand followed by Infra (22%) and Commercial (10%). Industry is expected to grow at the rate of CAGR 6-7% between FY19-FY22E backed by higher Govt. spending on infrastructure and affordable housing.
Prices have stabilised
Cement prices after falling continuously for three months seem to have stabilised for now. All India average price of the commodity has declined to Rs.330/bag, 9% down from its peak Rs362/bag recorded in mid May. While cement prices have stabilised, demand is not picking up which is matter of concern for the industry as well as for the economy. According to the industry sources, demand is weak both from the government and the individual housing. Further, prolonged monsoon in the South/West and slowdown in Govt. projects due to delay in payment have hurt the demand. However, most of the cement manufacturers are optimistic about both price and demand which they expect to pick up post Diwali.
Sand scarcity still persists
Use of cement largely depends upon availability of sand. For producing concrete, the ratio is four tonnes of sand for every tonne of cement. For other generic usage, for every tonne of cement, nearly eight tonnes of sand are required. Various NGOs and environmentalists have raised regular concerns illegal sand mining. As a result, many states are now depending on M-sand or imported sand to fulfil their requirements. The problem is that all states do not have enough M-sand infrastructure and not all states can import sand which in turn affects sand availability.
South & East hold key
In the short term, industry performance may strongly depend on pricing and volume outlook in South and East Markets. South which accounts for 1/3rd of the industry demand is under pressure for long time due to various reasons. In Chennai there is sand issue unresolved, in Bengaluru there is water problem and in Andhra there is issue of cancelling of orders by the newly elected government. Further, large numbers of upcoming capacity to the tune of 23.8MTPA in Eastern region may keep the price under pressure over the next few quarters.
Also, an important fact about Southern region is that it accounts for 33% of the total capacity while it produces only 23% of the total cement production in the country. In other words, supply demand gap can be filled up even without any further capacity addition in the short term. At the end of FY 2018, the region had surplus capacity of 83 million tonnes which is highest among the cement regions in the country. This figure of surplus capacity is unlikely to change much in the next few years, despite the region’s expected consumption growth rate of 8% pa over next three years. It is estimated that the region’s surplus cement capacity may slightly come down to 74 MTPA by 2021.
Benign cost saves the day
Despite poor demand there is some positive for the industry in the form of subdued cost pressure on raw materials. Freight costs have moved down due to softening of diesel prices during the last few months. Diesel prices are down by 7% year on year basis. Revised axle load rules are favourable to the industry which has also helped to bring down the freight cost slightly. Energy cost too has come down as the imported coal price is less by 42% year on year basis. It should be noted that freight, power and fuel are the key variable costs that form more than 60% of total costs.
Cement manufacturers are hoping that good Monsoon will result in good farm output which in turn should help in better rural demand. Further, declining interest rates should be able to pull more home buyers into the market which may help in real estate turn around. Still further, big push given by the government to infrastructure and housing should also help the cement sector. Thus, the cement manufacturers are not too concerned about the medium to long term prospects of the industry either.