Industry was expecting investment booster to the economy through various construction and infrastructure projects post-polls, and the demand was affected as these hopes were belied.

With increase in monsoon footprint and intensity in July 2019, pressure points were visible on cement demand, adding to the earlier pressures created by continued lull post-election, belying the expectations of the industry on increased project spending by the government.

The ET Cement Index that tracks cement price movements across the country has unusually remained flat/stable at 2,397.3 points between end-June and beginning of August 2019, after a marginal fall in June.

However, channel checks by the leading brokerage, CLSA indicated weakened cement demand trends in July across markets due to tough macro, tight liquidity, lull post elections on government spending, monsoon etc. The Union Budget 2019-20 for full year released early July proved to be a dampener, lacking in any big ticket investment plans.

Cement prices were down 7-10 per cent MoM in Andhra Pradesh & Telangana, while east has seen ~4 per cent MoM decline. Prices in north, central and Gujarat are down 1-2 per cent MoM, CLSA’s recent channel checks found.

"A part of the price correction is due to seasonality as construction activity tapers off during monsoons. However, the channel expects further pricing corrections in next few months as demand is likely to pick-up only post monsoon. We currently forecast 4-6 per cent Quarter-on-Quarter (QoQ) decline in realisations for our coverage during 2QFY20 and there is a possibility of earnings cuts in south-based players, if there are further (price) cuts," says Vivek Maheshwari, Investment Analyst of CLSA, in a report released on July 31, 2019.

"There has been a notable improvement in the cumulative rainfall received as the cumulative deficit has reduced from (-)19 per cent for the week ended 24 July to (-)9 per cent for the week ended 31 July," says Madan Sabnavis, Chief Economist, CARE Ratings in a report titled Weekly Monsoon Monitor dated August 2, 2019. Steep rise in prices in April and May 2019 have weakened the demand, curtailing the pricing power of the industry in the following months. In June, ET Cement Index eased 1.39 per cent at 2397.3 from the all time peak of 2431.1 points registered at the end of May 2019. With sharp 8 per cent Month-on-Month (MoM or compared to the previous month) hike pan-India in April, average trade prices in April-June were up by 11 per cent Quarter-on-Quarter (QoQ).

According to CLSA’s channel checks, across regions demand has been generally weak with very high pressures visible in the states of Andhra and Telangana post elections as activity has slowed down quite a bit, taking the July prices down 6-7 per cent versus 1QFY20 average for the south as a whole. In the east, prices have also been cut by 4 per cent Month-on-Month (MoM) in July, which is down 5 per cent versus 1QFY20. North, central and west (Gujarat) have seen 1-2 per cent MoM cuts in July and this is similar when compared with 1QFY20 average as there were strong hikes in the earlier quarter.

Drying up of funding sources for construction contractors has impacted construction activity in general, raising concerns over cement demand. Availability of sand has also been highlighted as an issue in some places, impacting construction activity.

Monsoon progress
The progress of the south-west monsoon reveals a notable improvement for the week ended 31 July with the cumulative rainfall deficit reducing to (-) 9 per cent and the number of sub-divisions recording deficient rainfall being 14, out of 36 divisions across the country. The rainfall deficit of (-) 9 per cent during the current season is at a 5-year high, according to Indian Meteorological Department (IMD).

Improved rainfall position coupled with relatively better distribution of rainfall bodes well for the crop production.

Spatial and temporal spread of monsoon in the sowing season will impact the agricultural crop outcomes and consequently, rural incomes, based on which the demand for cement from rural areas will be impacted. That is, a good monsoon can boost demand for cement due to increased construction activity.

The sowing crop situation as of 26 July’19 has also seen an improvement for a few kharif crops namely maize, urad, sugarcane and cotton as the sowing for the current season has been higher than the normal. However, the sowing of key crops namely rice, food-grains, bajra is significantly lower than the normal, according to CARE Ratings’ analysis.

Looking ahead
"IMD is expecting monsoon to be normal in August and September and is likely to be 100 per cent of the long period (50 years) average. In the balance two months, the progress of sowing and in turn the food production would be critical for overall consumer and wholesale inflation to remain benign," says CARE Ratings.

Maheshwari says, "Our interactions with industry players indicate that the demand is likely to pick-up only post monsoons, but we see lesser optimism at this stage on an imminent pick-up in the next few months due to tough macro conditions."