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The Add-On Effect

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Hetal Gandhi, Director – Research, and Koustav Mazumdar, Associate Director, CRISIL Market Intelligence and Analytics discuss the increased budget outlay for infrastructure to boost cement demand and to rapidly develop the east and central regions of the country.

The domestic cement industry has been in high demand over the past fiscal or so.
A rush of government spending on infrastructure has boosted consumption of this key commodity.
Demand for cement increased ~8 per cent in fiscal 2022, followed by ~11 per cent growth in the first 10 months of this fiscal. Sustained demand momentum in the last quarter of the current fiscal is expected to peg demand growth at 11 per cent for the full fiscal on a high base of the previous fiscal.
The infra-focused budget, presented on February 1, will ensure the momentum continues into the next fiscal.
A ~33 per cent rise in budgeted capital expenditure to Rs 10 lakh crore for fiscal 2024, and weighty allocations to infrastructure sectors such as roads and affordable housing augur well for cement demand, which is projected to rise 7-9 per cent to ~425 million tonnes in the fiscal.

The GDP Correlation
Rise in cement demand correlates with gross domestic product (GDP) growth as economic development requires heavy investments in infrastructure such as housing, roads, ports, etc.
The cement demand growth to GDP growth multiplier (i.e., cement demand growth divided by GDP growth in the same year) witnessed an unprecedented drop in fiscals 2020 and 2021, because of the pandemic-caused economic slowdown, but recovered rapidly in fiscal 2022, with cement demand and GDP rebounding at a similar rate.
This fiscal, the multiplier is expected to pick up pace as demand growth accelerates and GDP growth moderates on a high base. We expect the multiplier to remain >1, but to decrease marginally next fiscal, as cement demand increase moderates to 7-9 per cent on a favourable base, while GDP growth slackens to ~6 per cent because of global economic slowdown, transmission of interest rate hikes to consumers (leading to weakening industrial activity), and as the catch-up in contact-based services fades.
Budget announcements indicate a robust ~20 per cent increase in capital outlay for ~13 key construction-heavy ministries for fiscal 2024. Higher allocation to cement-heavy sectors, accelerated infra execution ahead of elections, and traction in rural affordable housing are expected to lead to 7-9 per cent rise in demand next fiscal on a high base of two consecutive years. This translates to ~30 per cent rise when compared with the pre-pandemic levels and a 9-10 per cent CAGR between fiscals 2022 and 2024.
The Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI) have received 25 per cent and 14 per cent more allocation, respectively, in fiscal 2024BE against fiscal 2023RE, despite overachieving fiscal 2023BE targets by ~10 per cent and ~6 per cent, respectively.
The allocation for Pradhan Mantri Awas Yojana (PMAY), which includes urban and rural housing, increased 3.2 per cent for fiscal 2024 against fiscal 2023RE. Compared with fiscal 2023BE, however, the revised estimate has seen ~60.7 per cent increase to Rs 0.79 lakh crore.
Allocation under the PMAY-Gramin scheme had been increased last fiscal, with the total expenditure rising to Rs 0.48 lakh crore after an initial allocation of only Rs 0.2 lakh crore in the 2022-23 budget. The government approved an additional Rs 0.18 lakh crore in November 2022, which will also aid demand growth in the first half of the upcoming fiscal.
However, allocation under PMAY-Urban is set to decline this fiscal as it draws to a close with over 1.08 crore units either completed or nearing completion, out of the sanctioned 1.23 crore units. Finally, though there is no change in the Pradhan Mantri Gram Sadak Yojana (PMGSY) allocation (at Rs 19,000 crore for the second consecutive year), there is no reduction in expenditure either. Also, 50 additional airports, heliports, waterdromes and advanced landing grounds have been proposed for improving regional air connectivity.
All of this will boost the already sturdy demand for cement in the upcoming fiscal.
As the capital outlay indicates, infrastructure will remain the key demand driver for the cement sector, led by government spending on roads, housing, urban infra, etc.
Rural housing demand is expected to grow at a healthy rate as well on the low base of last fiscal, increased allocation under PMAY-G, and healthy rural income owing to increase in crop prices. However, the weather and monsoon will bear watching.
On the other hand, urban housing demand is expected to moderate with the PMAY-U scheme coming to a closure, and a downward slide in real estate due to surging interest rates and high
capital values.
The industrial/commercial segment will continue to support demand growth amid capital expenditure push by large players, implementation of the production-linked incentive scheme, return to office/hybrid model of working, and overall economic recovery.

The Regional Landscape
Higher traction under PMAY-G, NHAI, and PMGSY will drive demand in the high-growth east and central regions. Around 3.4 million units are under construction in these regions as of January 2023 under the PMAY-G scheme.
Region-wise, demand growth is likely to be sharper in central and eastern regions, which account for ~80 per cent of PMAY-G construction and ~41 per cent of NHAI target set for fiscals 2020-2024. A favourable base, low per-capita cement consumption, and a big housing shortage will propel demand and keep utilisation levels stable in these regions, given aggressive capacity additions planned there.
South is lined up to follow central and east regions thanks to higher targets under Bharatmala Pariyojana, sharper execution under PMAY-Urban, and boost from realty and irrigation projects.
North India is expected to witness moderate growth on a high base, but various infrastructure projects — roads, metros, dedicated freight corridors, etc — and pick-up in real estate will support growth in the region.
In the west, demand is projected to grow at a moderate rate in the near term after rebounding sharply last fiscal. This region has various high-budget infra projects under execution, such as the Mumbai-Ahmedabad bullet train, trans-harbour link, and metro projects in Mumbai. However, north, south and west, comprising industrialised states, already have the highest per-capita cement consumption, which will limit their demand growth potential and will lag the other two regions in the future.

ABOUT THE AUTHOR:
Hetal Gandhi, Director – Research, CRISIL Limited
, is managing a team of over 20 analysts to track developments across infra and consumption space to know India’s role in this journey.
Koustav Mazumdar, Associate Director – Metals, Metallurgical Coal, Cement and Hydrogen,
CRISIL Limited.

Concrete

Lower sales realization impacts margins for cement makers in Q2 FY25

The industry encountered several challenges, including an extended monsoon season.

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Major cement manufacturers reported a decline in margins for the September quarter, primarily due to lower prices, which led to decreased sales realization.

With the exception of three leading cement producers—UltraTech Cement, Ambuja Cement, and Dalmia Bharat—smaller companies, including Nuvoco Vistas Corp, JK Cement, Birla Corporation, and Heidelberg Cement, experienced a drop in both topline and sales volume during the second quarter of the current fiscal year.

The industry encountered several challenges, including an extended monsoon season, flooding, and a slow recovery in government demand, all contributing to weak overall demand.

Despite these challenges, power, fuel, and other costs largely remained stable across the industry. The all-India average cement price was approximately Rs 348 per 50 kg bag in June 2024, which represented an 11 per cent year-on-year decrease to Rs 330 per bag in September, although it saw a month-on-month increase of 2 per cent.

In the first half of FY25, cement prices declined by 10 per cent year-on-year, settling at Rs 330 per bag. This decline was notable compared to the previous year’s average prices of Rs 365 per bag and Rs 375 per bag in FY23, as reported by Icra.

Leading cement manufacturer UltraTech reported a capacity utilization rate of 68 per cent, with a 3 per cent growth in volume. However, its sales realization for grey cement declined by 8.4 per cent year-on-year and 2.9 per cent quarter-on-quarter during the July-September period.

In response to a query regarding cement prices during the earnings call, UltraTech’s CFO Atul Daga indicated that there had been an improvement in prices from August to September and noted that prices remained steady from September to October. He mentioned that the prices had risen from Rs 347 in August to approximately Rs 354 currently.

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Concrete

Steel companies face Rs 89,000 crore inventory crisis

Steel firms grapple with Rs 89,000 crore stockpile amid import surge.

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Steel companies in India are facing a significant challenge as they contend with an inventory crisis valued at approximately Rs 89,000 crore. This situation has arisen due to a notable increase in steel imports, which has put pressure on domestic producers struggling to maintain sales in a competitive market.

The surge in imports has been fueled by various factors, including fluctuations in global steel prices and increased production capacities in exporting countries. As a result, domestic steel manufacturers have found it difficult to compete, leading to rising stock levels of unsold products. This inventory buildup has forced several companies to reassess their production strategies and pricing models.

The financial impact of this inventory crisis is profound, affecting cash flows and profitability for many steel firms. With domestic demand remaining volatile, the pressure to reduce prices has increased, further complicating the situation for manufacturers who are already grappling with elevated production costs.

Industry experts are urging policymakers to consider measures that can support local steel producers, such as imposing tariffs on imports or enhancing trade regulations. This would help to protect the domestic market and ensure that Indian steel companies can compete more effectively.

As the steel sector navigates these challenges, stakeholders are closely monitoring the situation, hoping for a turnaround that can stabilize the market and restore confidence among investors. The current dynamics emphasize the need for a robust strategy to bolster domestic production and mitigate the risks associated with excessive imports.

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Concrete

JSW and POSCO collaborate for steel plant

JSW Group and POSCO ink MoU for steel project.

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JSW Group has signed a Memorandum of Understanding (MoU) with South Korea’s POSCO Group to develop an integrated steel plant in India. This collaboration aims to enhance India’s steel production capacity and contribute to the country’s growing manufacturing sector.

The agreement was formalized during a recent meeting between executives from both companies, highlighting their commitment to sustainable development and technological innovation in the steel industry. The planned facility will incorporate advanced manufacturing processes and adhere to environmentally friendly practices, aligning with global standards for sustainability.

JSW Group, a leader in the Indian steel industry, has expressed confidence that the joint venture with POSCO will bolster its position in the market and accelerate growth. The project is expected to attract significant investments, generating thousands of jobs in the region and contributing to local economies.

As India aims to boost its steel output to meet domestic demand and support infrastructure projects, this partnership signifies a crucial step toward achieving those goals. Both companies are committed to leveraging their expertise to develop a state-of-the-art facility that will produce high-quality steel products while minimizing environmental impact.

This initiative also reflects the increasing collaboration between Indian and international firms to enhance industrial capabilities and foster economic growth. The MoU sets the stage for a promising future in the Indian steel sector, emphasizing innovation and sustainability as key drivers of success.

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