The Indian cement industry has shown some recovery in FY15 after witnessing an all-time low demand and profitability the previous financial year.
In the first nine months of FY15, growth in cement production picked up to 7.9 per cent as against 3.7 per cent in the corresponding period last year and 3 per cent in FY14.
A February 2015 update on the country’s cement sector by credit rating services and investment information provider ICRA attributed the growth to base effect and also weak and delayed monsoons which extended the window for continuation of construction activities.
The ICRA report noted that cement production declined by 8 per cent QoQ in the second quarter of FY14 due to arrival of monsoons but registered a healthy growth rate of 9.8 per cent YoY driven by base effect.
The extension of monsoons in south and labor availability issues due to festive season slowed down growth in cement demand in October 2014, the report said, adding that cement companies undertook substantial price hikes the same month impacting demand.
Cement production in the country declined by 1 percent YoY in Oct 2014. Though cement demand picked up in November 2014, growth in production remained muted at 4.5 per cent in the third quarter of FY15.
Taking into account factors such as political stability at the Centre, expectations of recovery in the economy and anticipated increase in infrastructure and private sector spending, the report said demand prospects for cement were likely to remain favorable.
India’s cement industry has been seeing a slowdown in new capacity addition due to the supply glut in recent times. Between FY11- FY14, the industry added 65 million tpa cement capacity as against 92 million tpa in the preceding three-year period of FY08-FY11.
The report said the slowdown in demand (cement production grew by 5.8 per cent during FY11-FY14 as against 7.4 per cent during FY08-FY11) had resulted in decline in capacity utilisation from 77 per cent in FY12 to 72 per cent in FY14 despite slowdown in fresh capacity addition. It added that the industry was expected to add 25 million tpa capacity in FY15, 23 million tpa in FY16 and 8 million tpa in FY17 as against the peak addition of 50 million tpa in FY10.
Analysing the industry’s expected capacity expansions region wise in the next two years, the report said the eastern region would lead with about 20 million tpa capacity addition during FY15-FY17 followed by northern region (13.4 million tpa). It added that the southern region, which had witnessed highest capacity addition in the last five years, was going to see a considerable slowdown adding only 7.9 million tpa of capacity in the next two years.
Assuming a demand growth of 8-8.5 per cent over the next three years, the report said the all-India cement capacity utilisation was likely to improve from 72 per cent in FY14 to 75 per cent in FY16 to 79 per cent in FY17. It added that delays in project execution and project commissioning could result in capacity utilisation levels crossing 80 per cent by the end of FY17.
The report expected cement prices to improve with recovery in demand in the coming period. The wholesale cement prices in north and west came under pressure in the second quarter of FY15 due to monsoons. Post monsoons, the recovery in prices had been slow. Cement companies raised prices by Rs.5-20 per bag in October 2014 but the prices again came under pressure in the months of November and December due to slow recovery in demand. While average cement price in the third quarter of FY15 slid below last year’s prices in north and west, the average prices in FY15 across most markets were higher than those in the corresponding period last year.
The decline in international coal and petcoke prices as well as the fall in diesel prices had benefited cement manufacturers, the report said.