Year 2018 saw reasonably good volume growth in cement in the country, though the price remained almost flat. On the other hand, increase in the pet-coke price and also that of diesel added to the cup of woes of cement manufacturers. But the situation improved vastly towards the end of 2018 when pet-coke and diesel prices started falling. Thus, cement manufacturers are entering year 2019 with a comfortable position as far as input costs are concerned.
Key cost items such as pet-coke, international coal and diesel prices are on the declining trend in the past two months. This may help the cement manufacturers to sustain their business without resorting to any price hikes in the near future. There is even a possibility of price reduction if the downward trend in input costs continues further.
Demand for cement from real estate is subdued due to prolonged dullness in the industry. However, increased pace of execution under various government housing projects in recent months has helped the cement industry to maintain double digit growth in the first half of FY 2019. For example, over the past 3 months, houses completed under the PMAY (Rural) scheme grew 25%, moving to 6.24 million which is 63% of the target (i.e. 10 million) houses which government is targeting in first phase by March-19. Also, demand from infrastructure sector like road projects is robust which also has contributed to better cement demand in last few quarters.
Impact of general elections
Election year has always ensured good times for the cement industry. Cement demand grew by 10% during 2009-10 while in its previous year growth was just 8%. Similarly, in 2014-15 cement consumption went up by 4.2% while in the previous year to that consumption had grown by just 1.5%. With the general elections scheduled in May’19 and other state elections like Maharashtra and Andhra Pradesh lined up post that, demand growth is likely to remain healthy during the year.
Before, the general elections, probably next month, GST on cement is expected to be brought down and placed on par with other building materials. However, historically, cement demand has remained independent of tax rates. Reduction in excise duty in the past has not shown any substantial change in the demand for the commodity, clearly indicating that cement demand is inelastic to its price. For example, the CENVAT rate on cement was reduced by 4% to 8.5% in December ’08, but demand growth in the subsequent year remained similar to the previous year at 8%.
Capacity addition in 2019 and beyond will keep the price rise under check as there will be increased competition among the producers to gain market share. It is estimated that there will be more than 70mtpa addition in cement capacity during the period FY2019-21. There will be further addition to capacity addition by way of de-bottlenecking. Thus, consistent capacity addition may create demand supply imbalance in some regions for some time thus, putting a break on upward price revision. As a result, overall capacity utilisation is unlikely to exceed 79%.
Of all the five cement manufacturing regions, South appears to be the most vulnerable region for the next one year due to increasing capacities and entry of Shree Cement. Shree Cement’s Gulbarga grinding unit kick-started in May last year for few days only when a major accident damaged the plant operations causing loss of 6 lives. Stacker and reclaimer were damaged due to heavy windstorm. After getting approval from the CMA and MoEF, the plant has restarted again from last August. The clinkerisation unit has commissioned on full-fledged basis from last week of December onwards and company has reportedly stopped procuring clinker from India Cements. Currently, Shree Cement is concentrating only on North Karnataka region and soon it will enter the growing Hyderabad/Amravati market. Thus, Shree Cement will soon challenge the dominance of UltraTech and Bharti in the region.
However, in Northern region there is no major capacity addition till the second half of next financial year which may tempt the manufacturers to go for price hike, if the market conditions turn favourable. With the take over Binani Cements by UltraTech, latter’s reach in Gujarat (especially Norther part of the state) has increased which may see increased supply in the region in coming months.
Traditionally, housing sector accounts for 60-65% of total demand for cement while 30% of the demand coming from infrastructure. However, pattern is changing slowly with roads & infrastructure segment gaining huge traction with multiple projects being executed in Smart Cities, Airports, Metro Projects, Sea Ports, etc. As a result, share of Bulk Cement in total despatch has shot up to 20% from mere 5% (in FY2013). Ready Mix Concrete (RMC) demand has also picked up significantly on the back of huge demand coming from metro projects, mass housing projects, high-rise residential projects.
On the whole, year 2019 for cement industry is likely to be uneventful one with not much expected on demand and price fronts. General elections, Monsoon and health of real estate sector are the important factors which may have bearing on cement industry.