The demand growth trend picked up steam in FY18. Expectations are rife that FY19 will consolidate these gains and result in higher capacity utilisation, if not pricing power.
After a couple of years of demand pressures and price pressures, the Indian cement industry is expecting a full-fledged recovery in demand growth in the current fiscal. Cement production grew by 6.3 per cent and touched 298 million metric tonnes (MMT) in FY18 (2017-18), from 280 MMT in FY17, which is a 1.2 per cent fall compared to FY16. Apart from growth in demand seen in some key markets, rating agency ICRA has attributed this growth also to "the base effect of the demonetisation-driven low demand during the corresponding period of last year."
The demand for cement also dipped along with the deceleration in growth in the economy following currency demonetisation in November 2016, which derailed the growth momentum across several industries. Close on the heels of this debilitating disruption, hurried introduction of Goods and Services Tax (GST) has also left its negative trail. The growth reported in FY18 has come from the last two quarters of the year – at 11 per cent and 18 per cent respectively, despite negative growth registered in the first half of the fiscal. Analysts are considering this growth trend to be the first sign of sustained growth to be witnessed in the next few years.
Two-thirds of the total cement demand comes from housing and the remaining from infrastructure and industrial construction. "Two areas where we evidently see growth from for the cement industry is from housing and infrastructure. For the current year, we expect 5.5-6.5 per cent growth in cement production, says Ashish K Nainan, Research Analyst – Industry Research, CARE Ratings.
Is there any scope for increasing cement consumption in India? The answer is in the affirmative. Despite India being the second largest producer of cement in the world, even after two-and-a-half decades of globalisation, its per capita consumption is down in the dumps. "India is one of the lowest in per capita consumption of cement. Average consumption in India is just ~200 kg/year compared to 1700 kg/year in China and 660kg/year in Vietnam (comparable developing economy). The global average consumption is far ahead at 580kg/year," says Anoop Kumar Saxena, CEO-VICAT in India.
Calling FY18 as ‘a landmark year for the industry’ which has surpassed all odds and delivered reasonably good operating results, Vaibhav Agarwal, Analyst with PhillipCapital India Research, says, "FY19 will be a ‘year of pure execution’ driven by improving operating efficiencies, focus on a sustainable rise in volumes, and the industry re-establishing its attention on improving cement prices, led by UltraTech." Triggers
Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA, who has hinted at the first signs of revival in cement demand as back as in February 2018 itself and predicted around 5 per cent growth in FY19, said then, "This demand growth is bolstered by a pick-up in the housing segment – primarily affordable housing, rural housing and higher infrastructure spend. Improved rural incomes, higher rural credit and increased allocation for rural, agricultural and allied sector are likely to boost rural housing demand."
"Further, Pradhan Mantri Awas Yojana (PMAY) continues to be a major driver for cement demand with around 50 lakh houses targeted in the rural areas and 37 lakh houses in the urban areas in FY2019. Also, the demand is likely to be supported by the higher outlay on urban housing and the increased thrust on infrastructure as reflected in 21 per cent higher allocation," Majumdar added.
Despite several micro and macro challenges, such as demonetisation, GST, RERA, bans on overloading, sand mining, and petcoke, many of which were structural, the industry has seen a visible demand recovery in FY18, especially in the second half.
"A substantial recovery in rural demand especially from Individual House builder (IHB) segment along with sustained pickup in infrastructure development aided demand growth. We believe demand growth for current fiscal should remain healthy mainly to be supported by PMAY housing projects and continued thrust on infrastructure development," says Binod Kumar Modi – Senior Analyst – Reliance Securities.
Real estate sector witnessed disruption in construction and sales activity beginning demonetization exercise. The disruption continued with builders taking a cautious approach to RERA [The Real Estate (Regulation and Development) Act, 2016] implementation, temporarily halting new sales or construction. Implementation of RERA in May 2017 impacted the demand for cement from real estate segment in Q1 and Q2 of FY18.
FY18 witnessed implementation of Union Government backed mega-infrastructure projects such as Bharatmala for roads, Sagarmala for ports and development of dedicated freight corridors and smart city project.
"We feel the current focus from the Government is positive for the cement sector in particular. Infrastructure offers a huge tapable market for cement in India, but is limited due to limited funding for these projects at the moment. On the other hand, housing in rural and urban markets are expected to witness steady demand on the back of higher disposable income and factors like good monsoons," says Nainan.
The demonetisation exercise had impacted the demand from rural and retail real estate segment during the second half of Q3 and, Q4 in FY17. But the same has evidently recovered during FY18.
Demand drivers
VICAT India, having presence mostly in South India, expects that cement demand expected to grow ~7-8 per cent year-on-year (YoY) over the next two-three years. By now it is a given with several analysts predicting that the demand growth for cement during FY19 will surpass 5 per cent level.
Cement consumption is broadly classified into demand from three distinct segments:
Housing and real estate (65%)
Public infrastructure (20%)
Industrial development (15%)
All the analysts ICR spoke to are voting for affordable housing as the prime mover of cement demand in the coming years. Nainan of CARE says, "If one were to go by the bare-minimum market demand, affordable housing is a 8-10 billion sq.ft. opportunity. And this would form the backbone for cement demand over the next 2-3 years. Expect a 6-7 per cent growth in demand in the housing segment for cement.
Additionally, the Government has set aside Rs 6,500 crore for affordable housing in the budget which will work like a stimulus."
Stating that ICRA expects the cement demand to show a growth of around 6 per cent in FY2019, Majumdar says, "This is primarily driven by a pick-up in the affordable and rural housing segments and infrastructure – primarily road and irrigation projects. The budget of FY2019 also provides support in this direction with higher rural credit, increased MSP, increased allocation for rural, agricultural and allied sectors along with continued focus on the PMAY and infrastructure investments."
Table 1. Affordable Housing – Gross Budgetary support)
2017-18 2018-19
PMAY-Grameen Rs. 23,000 Rs. 21,000
PMAY-Urban Rs. 6,043 Rs. 6,500
"The cement consumption stood at an estimated volume of 305 million tonnes (MT) in FY18, and is expected to grow at 6-7 per cent over the next 3-5 years, on the back of higher government spending in rural and urban housing projects and growth in infrastructure spends," says Madhumita Basu, Chief of Sales, Marketing & Innovation, Nuvoco.
In the residential real estate segment, the demand was subdued in comparison to previous year due to introduction of RERA in May 2017. RERA led to disruption in construction activity and real estate developers went slow on launching new projects in Q1 and Q2 FY18. However, this dip in demand was offset by demand from construction of affordable housing.
BK Modi believes that infrastructure share in total cement consumption is likely to move up from ~25-30 per cent going forward, while explaining, "Growing urbanisation and huge infrastructure deficit in the country – which requires infrastructure development as to support sustained GDP growth – are likely to ensure higher cement consumption in this segment."
Infrastructure projects like smart cities, metro projects, roads, ports and airport projects are expected to boost cement demand would witness higher growth of 8-10 per cent from this segment. "Infrastructure development has been a key plank for the current Central Government and few key projects are nearing completion especially in the view of a nearing General Election," says Nainan.
Infrastructure contributed immensely to the cement demand in FY2018. And pre-election spending has been one of the key demand drivers for cement historically in India, particularly from infrastructure segment. It can be sensed from the favourable budget allocations on Metros, road and highways, railways, ports and irrigation projects. "We further expect traction in road construction to continue in FY19 considering 7,400 km (up 70 per cent YoY) projects awarded in FY18. Additionally, Bharatmala programme – which targets to build approximately 34,800 km by 2022 in Phase I, with an estimated investment of Rs 5.3 trillion – is likely to aid sustained demand growth for cement industry," says BK Modi. Capacity additions
In their zeal to gain market share, aggressive manufacturers added robust capacity, leading to capacity utilisations collapsing from peak full capacity in 2008 to less than 70 per cent. However, expansions helped many manufacturers gain scale and size. "From here, we expect the industry to consolidate its position and then announce green field capex. Brownfield expansions and revival of unproductive assets will drive capex from FY19 to FY21," says Agarwal of PhillipCapital.
Madhya Pradesh, Rajasthan, Andhra Pradesh, Gujarat, Chhattisgarh, Tamil Nadu and Karnataka are the largest limestone producing states in the country which is an essential raw material for cement. "Currently, cement production capacity is 441 MMT and expected to increase to 467.3 MMT by 2019 and likely to further increase to 484.1 MMT by 2020-2021. Significant concentration of the cement capacities will continue to increase in southern and western regions, largely due to bulk of limestone reserves in these regions," says Saxena of VICAT.
However, capacity utilisation is expected to remain in the range of 65-70 per cent in the next two-three years, analysts say.Consolidation
Acquiring cement assets is cost-effective for the acquirer and provides access to new market and a ready-made supplier network. Cement industry is fragmented and 55-60 per cent market share is controlled by large players and consolidation in cement sector has not significantly changed the share of large players.
Agarwal feels that incremental consolidation will be slow. However, BK Modi is of the view that considering the ongoing high cost scenario and muted realisation environment, it could be difficult for many small and mid-sized cement companies to operate in dismal profitability. "Hence, industry consolidation will continue going forward."
Nuvoco’s Basu thinks that with the major players adding capacity; the prices will come under pressure as ramping up of new capacity and capturing market growth would take priority. Looking ahead
The demand for cement will continue to grow at above 5 per cent level in the next two-three years, mainly with push coming from affordable housing projects in both urban and rural areas. The next one year is expected to be good for cement demand from infrastructure segment, being a pre-poll year. Industrial consumption of cement has been muted since November 2016 and it is unlikely to get a leg up.
The hectic consolidation activity is expected to slow down a bit going ahead, but the scene is expected to shift to smaller and newer players, with costs inching up day by day and continuing pricing pressures. Though operating environment of the industry has improved in FY18, the same cannot be said about FY19 given rising costs, unless demand spikes.
Availability of sand is a major challenge to the construction activity in India. Though artificial sand is being pitched as an alternative, its acceptability is still low.
Cement capacities, expansions and prices will be driven by regional considerations more than anything else. CARE ratings predicts that the all-India prices will remain in the range of Rs 317 (+/- 5 per cent per bag post GST) during the year."
From the present stand point, the industry has to guard against risks like hindrance to volume growth momentum and rising costs.– BS SRINIVASALU REDDY
![](https://indiancementreview.com/wp-content/uploads/KLUBER.jpg")
Uncategorized3 weeks ago
Concrete4 weeks ago
Uncategorized3 weeks ago
Uncategorized3 weeks ago