COVID-19 virus that has thrown the economic activity out of gear across the world has also halted the Indian cement industry supply chain to a grinding halt.
Covid-19 (Corona) virus is wreaking havoc in India as it has done across the world, without discrimination between developed and developing nations. Declared the pandemic by the World Health Organisation (WHO) considering its devastating nature on mankind, Covid-19 has taken a toll of over 52 people in India, while the figure is over 40,708 people across the world, by end-March 2020.
The virus that has originated in Wuhan in China has spread its tentacles to over 8.26 lakh people across 179 countries in the world and there is no known antidote to this virus as of now. And it is threatening to derail all kinds of business activity with most of the governments across the world suggesting self-isolation or lockdown in their respective countries to contain its spread. In India, lockdown was declared on March 23, for three weeks starting the next day.
Under the lockdown, movement of people and goods, except those working in/ offering essential products/services, were halted across the country without any prior notice.
Given various countries have suffered deeper impact of the virus in terms of loss of lives ahead of India, the industry in general, and cement industry in particular, were expecting that stricter measures would come into force soon to stem the spread of the virus, and in fact, some cement manufacturers were even planning to bolster their inventories at various levels of the supply chain before such measures are announced. Fuel prices taking a 30-40 per cent dip by the middle of March 2020, and most of the cement factories having sufficient inventories of fuel for the next 30-60 days of operations, were conducive for such a move. However, all these expectations were belied with the lockdown coming into force without notice.
"The adverse effects of that will follow (the lockdown) can dwarf the gains from the sharp drop in crude oil prices, and the anticipated monetary and fiscal stimuli," said rating agency CRISIL on March 26, 2020.
Immediately after the lockdown came into force, several cement companies which have already truncated their operations to avoid spread of the virus among their employees, decided to halt their operations. JK Cement's facilities at Nimbahera and Mangrol, both situated in Chittorgarh, Rajasthan, and units at Gotan (Nagaur, Rajasthan), Jharli, (Jhajjar, Haryana), Katni (Madhya Pradesh) and Aligarh (Uttar Pradesh), were shut down immediately until further notice. India Cements had also announced shutting down operations at its plants across the country due to the pandemic, in line with the government directives. The Tamil Nadu headquartered company had its cement plants located in Tamil Nadu, Andhra Pradesh, Telangana, Rajasthan and Maharashtra.
UltraTech Cement, the biggest cement producer in the country, has also shut down its plants at various locations, however, stating that the situation was "dynamic " and that it was monitoring it from time to time. Ambuja Cement and JK Lakshmi Cement also followed suit. India has the world's second largest cement production capacity.
Infrastructure & Construction
The nation-wide lockdown has stalled execution of various infrastructure and construction projects across various cities in a big way, though it has come up only during the last month of the quarter and financial year. "This would impact the revenue growth of construction companies in the near term. Typically, 4Q (January-March 2019-20) accounts for 30-35 per cent of the annual revenue of construction companies; of which a month's lockdown can erode 8-10 per cent," says India Ratings and Research (Ind-Ra) in its report released on March 25, 2020.
"The agency believes that construction activities across construction hub cities such as Mumbai Metropolitan Region, Delhi, Pune and Bangalore are likely to be stalled or progress at a significantly slower-than-anticipated pace for a major portion of March 2020 which may continue in April as well," Ind-Ra added, citing that these cities are turning out to be the epicentre of the outbreak.
Furthermore, any extensive spreading of COVID-19 in the country for a longer period can have a significant bearing on the credit profiles of the companies operating in the sector, Ind-Ra warned.
Just before the "Janata Curfew" (people's self-isolation) programme was imposed on March 22, 2020, the Ministry of Shipping has issued a protocol mandating vessels calling at Indian ports from infected countries within 14 days have to be quarantined until they complete the 14-day period from leaving the earlier port. This is expected to escalate the costs of cement manufacturers importing their bulk limestone requirements from the United Arab Emirates (UAE), Qatar and Oman, where the voyage is about three to four days only, particularly to reach ports in India's west coast. For them, demurrage and other costs are expected to shoot up by 30-40 per cent according to some experts. However, it is unlikely to affect imports to ports in east coast much as they are slightly longer haul in nature.
With most of the non-essential manufacturers like cement makers are on closing spree in the wake of government directives for national lockdown, even exports are expected to nose-dive, if the lockdown is prolonged, whatever the reason.
CRISIL, on March 26, 2020, has slashed India's Gross Domestic Product (GDP) projectionfor fiscal 2021 (2020-21) by 1.70 per cent from its earlier projection of 5.2 per cent. Dharmakirti Joshi, Chief Economist, CRISIL, says "We have slashed our base-case gross domestic product (GDP) growth forecast for fiscal 2021 to 3.5 per cent from 5.2 per cent expected earlier. This assumes two things: a normal monsoon, and the effect of the pandemic subsiding materially, if not wearing out, in the April-June quarter. The slump in growth will be concentrated in the first half of next fiscal, while the second half should see a mild recovery."
CRISIL said that all of this is affecting demand for cement and concrete. This in turn feeds through to producers and their suppliers.
Ind-Ra had revised the outlook on the construction sector to negative from stable for FY21, on account of the expectations of muted order inflows in a few sub-sectors and significant risks emerging from the exposure of certain construction companies to the state governments of Andhra Pradesh, Telangana, Tamil Nadu and Uttar Pradesh.
Furthermore, with the funding woes of the banking sector and the overall fragile economic scenario, the disbursements and sanction of additional limits to construction companies over the next few months to happen at a sluggish pace. ôIf situation worsens, the demand may collapse to unimaginable numbers and if it improves it may just be vice-versa," adds Ind-Ra.
Commenting on the Covid-19 impact, Ashu Suyash, MD and CEO, CRISIL, says, "The non-linearity and complexity of what's unfolding creates uncertainties not only for businesses but for all mankind, and weighs heavily on sentiment and outlook, with risks tilted to the downside. Inability to control the pandemic and extension of the lockdown will aggravate supply and demand shocks."
- BS SRINIVASALU REDDY