Portfolio

Cracking under excess load

RAJALAKSHMI SIVAM | Updated on November 10, 2017 Published on February 05, 2011

Even as demand is looking up, holding up the price line will be a challenge for manufacturers as supplies weigh in.

In 2009, when recession was exerting pressure on demand for most other sectors, players in the cement industry were on a strong wicket with double-digit growth in despatches. With demand holding up, no one seemed worried about a supply overhang, even though players invested heavily in capacity additions. However, this picture has taken a 180 degree turn in the past one year, thanks to an unexpected drop in cement demand, combined with the build up of supply in the market.

The phased withdrawal of the stimulus package by the government, the completion of Commonwealth Games-related construction activities in Delhi-NCR, the disruptions in infrastructure work in Andhra Pradesh and a fairly robust monsoon, all played spoilsport and applied the brakes on the rate at which the cement industry was growing.

But, even while demand slipped from the double-digit levels, capacity additions continued, expanding by 13 per cent, taking total capacThis undermined market prices by 10-15 per cent. Producer-side price arrangements didn't seem to work for too long either, as some players preferred to drive volumes at lower prices, when capacity utilisation levels on their plants dropped below manageable limits.

Now, even as demand is showing signs of looking up, post-monsoon, holding up the price line will continue to pose a challenge for cement manufacturers. Losing pricing power in a scenario where raw material costs are shooting up would mean lower margins at the operating level for manufacturers.



Offtake will improve



On the demand front, the cement industry may live up to expectations in the current year, managing a 10-11 per cent growth in despatches (GDP growth estimates for 2011 are at 8.8 per cent) with the resurgence in residential housing and construction demand. As real-estate projects saw a slowdown in the execution in 2008 and 2009, the sector does have plenty of pent up demand from home buyers who are now returning to the market on the prospect of a better outlook on incomes and hiring. Cushman & Wakefield, a global real-estate consultant, reports that the mid-sized housing segment will in fact see demand outstripping supply in 2011.

Government spending on housing and infrastructure projects will also be higher in 2011 as the Eleventh Plan is drawing to a close (by FY-12) and public projects rush to spend their outlays and meet their deadlines. Offtake will improve further if manufacturers get road concretising orders.

The Cement Manufacturers Association has for more than a year been making a case for using cement by transitioning to concrete roads. Several states have evinced interest in this, given the high maintenance costs involved in the upkeep of bitumen roads.

While demand growth, thus, seems quite certain at the national level, regional disparities may continue to persist. The southern region may continue to put up a gloomy show.

With political issues not yet resolved in the state of Andhra Pradesh, how fast consumption will get to levels, pre-slowdown, remains a question. Players that operate concentrated capacities in the South — India Cements, Madras Cements, Dalmia Cements and Chettinad Cements may be engaged in a fight for market shares. India Cements and Dalmia Cements may benefit through contributions from their recently added capacities in west (1.5 mtpa plant in Rajasthan by India Cements) and East (Dalmia Cements acquired OCL, a cement plant in Orissa) India respectively.

While the picture on volume growth may improve from last year, it is clear that the toplines of cement companies will rely mainly on volumes rather than realisations. CMIE forecasts an addition of 25 million tonnes of capacity in the industry during the year (a 10 per cent increase).

With the cement industry running only at 70 per cent capacity utilisation levels (following addition of close to 30 million tonne of capacity last year), the new capacities will, however, not be completely utilised even if the demand grows at 11 per cent this year. This paints a picture of flat or just moderate growth in cement prices in the current year.

Margin pressure

The 25-30 per cent operating margins that cement players have managed over the last two years will be difficult to maintain this year. While one reason for this is the likely lower realisations, the other would be the increase in input costs.

Thermal grade coal, which is used to fire cement kilns and operate captive power plants of cement producers, is seeing strong demand from South-East Asian and European countries.

With the mine supply not expanding enough to meet requirements, and production costs too rising for miners, coal prices are expected to harden further (coal prices have rallied 46 per cent in 2010; currently at $123/tonne at Newcastle, Australia).

The cement industry's reliance on imported coal has risen significantly over the last two years as there has been shortfall in supply from the government allotted linkages. Pet coke, a substitute fuel for coal, has also seen sharp price increase linked to crude oil price table, and players such as Shree Cement which use pet coke extensively are already seeing severe margin pressures. Increasing cost of fly ash (used in making PPC grade cement), lime stone, railway freight and diesel prices are eating into producers' margins.

Companies that have expanded on borrowed funds last year may also have to contend with yet another source of pressure- rising interest costs. In a scenario were realisations are falling and input costs are squeezing margins higher interest expenses may suppress profits further. Prism Cement, Birla Corp and JK Lakshmi Cement have seen sharp increase in loan funds over the last year.

No clarity in prices

Like for most other commodity sectors, price holds the key to profitability for cement manufacturers. However, an unexpected drop in demand and a relentless supply build-up kept up steady pressure on cement prices in 2010.

While the South saw a steep 20-25 per cent price correction (to Rs 170-210/bag), the players in the North saw a milder 5-8 per cent drop in price last year. Will cement manufacturers be able to get back to the high realisations of 2009 (all-India average Rs 260-270/bag) again? This does not appear likely at least for the next year or so.

Manufacturers, as of now, seem to be seeking only temporary solutions to the problem of falling prices. In the South, they have pegged up prices and curtailed output. Arrangements such as these, however, have not helped hold up prices for extended periods anytime in the past.

A stable uptrend in price may become possible only when the demand-supply equation settles in favour of the manufacturers. And for this to happen, the producers need to wait for demand to play catch up with existing capacities.

With lower realisations and margins taking a twin toll on profits and capital already tied in capacities which are currently under-utilised, chances are that capacity additions may slow down from 2012.

c:set var="prUrl" value="https://premium.thehindubusinessline.com" />

Read further by subscribing to

The Hindu Businessline

What You'll Get

  • Web + Mobile

    Access exclusive content of the Hindu Businessline across desktops, tablet and mobile device.


  • Exclusive portfolio stories and investment advice

    Gain exclusive market insights from the Hindu Businessline's research desk.


  • Ad free experience

    Experience cleaner site with zero ads and faster load times.


  • Personalised dashboard

    Customize your preference and get a personalized recommendation of stories based on your intrest.

This article is closed for comments.
Please Email the Editor