Indian cement industry, with a total installed capacity of around 209 million tonnes per annum (MTPA) as of March 2009, is the second largest in the world after China. However, of late, Fitch, the global rating agency, warned that the outlook for the country’s cement industry is expected to remain stable to negative in 2010.

The agency outlined various factors that will possibly hold back the industry’s growth in 2010. Factors that are likely to be majorly responsible for the industry’s sluggish growth this year are as follows:

·         Relatively slower recovery of the Indian real estate sector

·         Expected withdrawal of the fiscal stimulus packages by the government

·         Overcapacity risks

“Encouraged by rising demand and buoyant economic conditions since 2005-06 onwards, several Indian cement manufacturers announced large-scale capacity expansion programmes and majority of the announced capacity additions are scheduled to be commissioned this year. If the commissioning happens as per schedule, then it would significantly reduce capacity utilisation rates. This, coupled with increased freight costs will soften cement prices further, thereby affecting the profit margins of most cement manufacturers,” says Rashid Bhai Jivani, general manager (marketing) of Decora Cement, a mid-sized cement firm in Rajkot, Gujarat.

Regional variation in prices

Increasing demand kept cement prices in South India higher as compared to the all-India average in 2008-09. For instance, cement prices touched Rs 278 per bag in July 2009 in the southern region. But a combination of factors such as additional capacity expansion (around 7 MT during the period April-December 2009), declining demand, unprecedented floods and political dispute for a separate state of Telangana led to a steep decline in cement prices in the region. At present, the average cement price in South India stands at around Rs 255-260 per bag.

Of late, the western regions of the country, especially Maharashtra, are also witnessing a drop in cement prices. This is because the excess supply from South India is now being moved to the nearby markets in western India. Currently, cement prices in Maharashtra have been corrected by Rs 20 per bag over that of the previous year level.

However, prices in northern, eastern and central regions are expected to remain stable due to continuing growth in demand.

On the brighter side

The cement industry reported more than 13% growth in volume dispatches during the period April-December 2009, as opposed to the previous year.

Moreover, industry experts opine that cement firms having strong balance sheets, improved cost structures and plants at various geographical locations will be better equipped to fight the impact of declining prices and capacity utilisation rates, which is likely to happen due to commissioning of large-scale capacity expansion projects this year.  “The current drop in cement prices, along with excess capacities may prompt cement firms to delay the commissioning of the announced capacity expansion programmes, which in turn is expected to cushion the recent demand-supply gap to some extent,” says Ankit Mangla, director of Super Ultra Tufs Cement, a New Delhi-based mid-sized cement player.

Going forward, rising demand and increased government spending on infrastructure is likely to ramp up the sector’s growth as well as improve the profit margins of most cement players.

Jeeta Bandopadhyay