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Outbreak of the COVID-19 pandemic in the Indian sub-continent which forced the government to announce a nationwide lockdown, 25th March 2020 onwards affected the domestic cement production during FY20. Construction activity across the country was halted, which is normally at its peak in the month of March, affected the cement offtake. Production fell by 24.7 percent during March 2020 as compared with the 15.7 percent growth achieved during March 2019.
Capacity
As per Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region wise, the Southern region comprises of 35% of the total cement capacity followed by the Northern, Eastern, Western and Central region comprising of 20%, 18%, 14% and 13% of the capacity respectively.
Chart 2:
Installed capacity and Capacity Utilization rate of Cement Manufacturers (Unit: Million Tonnes) Installed Capacity of domestic cement manufacturers has increased at a CAGR of 7.1 % during FY16-20. Manufacturers have been able to maintain a capacity utilization rate above 65 % between FY15-19 but prolonged rains in many parts of the country and with the temporary closure of cement plants during the government enforced lockdown has led to the capacity utilization rate to fall from 70 % during FY19 to 61 percent during FY20.
Demand Drivers for the Cement Industry
Cement demand is closely linked to the housing and infrastructure sector. Increasing demand coming from affordable housing and construction work for government infrastructure projects like roads, metros, airports, irrigation etc. should ideally support the demand for cement going forward.
Chart 3:
Key growth drivers for the Cement Industry
National Infrastructure Pipeline: Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified. The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together are to account for 79% of the proposed investments in the 6 years period to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.
Affordable Housing: Under the Pradhan Mantri Awaas Yojana (PMAY) the centre had introduced the credit link subsidy scheme, in May 2017, which was initially extended till March 31st, 2020 but now has been extended for one more year till March 2021. The credit link subsidy scheme has benefitted 3.3 lakh families till now and aims to benefit another 2.5 lakh to get affordable houses.
Prices of cement
Source: CMIE
Chart 4
Trend in prices
Wholesale and retail prices have increased by 11.7% and 12.5% during FY20. Prices have started correcting Q4FY20 onwards due to revival in demand due to given the restart of major infrastructure projects, new launches, pick-up in the real-estate demand in urban areas and announcement of the NIP.
Financials The overall sales revenue has increased by only 1.3% during FY20 as compared with the 24.4% growth rate achieved during FY19. Overall expenditure has declined by 4.5% which has benefitted the industry largely given the moderation in sales. Selling and distribution, cost of raw materials and fuel/electricity cost encompass around 70% of the total expenses for cement manufacturers.
– Electricity and fuel cost have declined by about 12.7% during FY20 due to the sharp drop in crude oil prices.
– Logistics costs which are the biggest cost for cement industry has also dropped by 7.9% (selling and distribution) as the railways extended the benefit of exemption from busy season surcharge.
– Cost of raw materials too declined by 4.4% given the price of limestone of had also fallen by 9.6% during FY20
Outlook for FY21
Cement production is to fall sharply by 25-30% during FY21 and capacity utilization is to be around 40-45%.This will be the steepest ever fall in production (and capacity utilisation) that the industry has ever witnessed. Production of cement has fallen by 0.8% during FY20 as against the grown of 13.3% during FY19.
Cement manufactures are not expected to make any additions to the existing CAPEX and given the limited demand present there has also been CAPEX deferral announcements.
The nationwide lockdown has come at the time when construction activities is at its peak and it will be followed by the monsoon season where again the construction activity will be impacted thereby affecting entire dynamics of demand-supply for cement.
Towards Recovery Partial Recovery Stressed
Given the weakness in end user demand due to the lack of activity in the housing and infrastructure sector the cement industry is expected to remain in the red zone till October 2020 at least, till the end of the monsoon season. Partial recovery is expected November 2020 onwards and normalisation of operations post January 2021 onwards.
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