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Despite surge in demand, cement price growth to remain muted in FY19

CementDespite a surge in demand, the growth rate in cement prices is expected to stagnate at around 3-4 per cent for the ongoing fiscal year owing to an oversupply situation.Although market consolidation, especially in north India, is under full swing with UltraTech Cement, the largest cement firm in the country, beginning a slew of acquisitions starting with Jaypee in 2017 and then Century Textiles & Industries and Binani Cement this year, total installed capacity in this region is poised to increase on account of brownfield projects undertaken by companies like Shree Cement and others.In the already saturated southern zone, new capacity additions are also coming up, primarily in Karnataka.“The fact is there is enough capacity in the market than the demand. On the other hand, the total capacity is increasing furthermore. Thus, in the near future, prices cannot be very high and the growth in prices will be in the range of 3-4 per cent”, H M Bangur, managing director at Shree Cement said.While Shree Cement is putting up a 3 million tonne per annum (mtpa) plant in Karnataka at a cost of Rs 20 billion to mark its southern foray, it is also in the process of opening a second 2 mtpa unit in West Bengal at a cost of Rs 5 billion. Dalmia Bharat Cement has also opted for brownfield expansion in Odisha and West Bengal at a Rs 35 billion investment.Birla Corporation is in the process of setting up a 3.9 mtpa project in Maharashtra at an investment of Rs. 24.50 billion. JSW Cement is also doubling its 2.4 mtpa capacity in West Bengal.In the coming fiscal year, capacity addition of around 5-7 mt is expected in the eastern and western region with the others – central, northern and southern regions – expected to witness a total addition of 8-10 mt production capacity.Sujit Ghosh, executive director of new building solutions at Dalmia Bharat reasoned that although the overall demand is far less than the installed capacity, companies embark upon such greenfield expansions to either cater to new emerging markets or strengthen presence in the highly competitive cement space.Cement production during the first half of the current fiscal year stood at 162.4 million tonne (mt), which is 14.4 per cent higher than the 142 mt production in the first half of the last fiscal year. However, capacity utilisation remained at a meagre 69.8 per cent of the total installed capacity of 465 mt.According to the Cement Manufacturers’ Association, the cement industry has grown over 50 per cent in installed capacity since 2012, representing around 10 per cent of global installed capacity. The industry produces cement in 210 large plants and 350 small plants. Among the large plants, 77 are located in the cement clusters of Andhra Pradesh, Rajasthan and Tamil Nadu.A Care Ratings report stated that this year the demand was primarily led by steady implementation and completion of mega-infrastructure projects, especially in the northern and central region with Rajasthan and Madhya Pradesh set for assembly elections.“Union Government-backed mega-infrastructure projects such as Bharatmala for roads, Sagarmala for ports and development of dedicated freight corridors and smart city projects witnessed a surge in activity in terms of award and implementation of new and existing projects respectively. Around 34 infrastructure projects with an outlay of over Rs 1.50 billion have been completed in the April-August period across major infrastructure sectors”, the report said.It furthered that the overall operating margin for the industry has declined by three per cent y-o-y due to fuel, freight, currency and power cost impact. Additionally, clinker – a key raw material for cement – too has witnessed an increase in a few regions, which has further impacted the operating margins of some companies.On the other hand, the manufacturers are finding it difficult to pass on the costs due to the heightened competition across most of the regions.
Source: Business Standard