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Cement: Budget cheers - Views on News from Equitymaster
 
 
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  • Mar 6, 2002

    Cement: Budget cheers

    The infrastructure industry in the country has finally got the good news it was looking for. The Government has announced that the Golden Quadrilateral project is ahead of schedule and is likely to be completed by December 2003.The government has also announced increased budgetary allocation towards the rural road projects. This year the budgetary allocation for this project has gone up to 75 bn from 50 bn last year. These announcements from the Finance Minister highlight the commitment of the Government towards improving the road infrastructure within the country, both at the urban and the rural levels.

    As a result of these announcements, it is felt that the North-South-East-West highway corridor projects will receive increased attention once the Golden Quadrilateral project is completed. The implementations of these ambitious projects have ensured a consistent demand for commodities like cement and steel. The demand for cement is dependent on the level of concretisation proposed. The demand for steel will mainly come from bridges, culverts and bypasses. The table below shows demand for cement from the various projects.

    Project Incremental cement
    demand* in million
    tonnes (mn)
    Expected date of
    completion
    Golden Quadrilateral (5850km) 4mn-5mn 2003
    North-South-East-West corridors (7300 km) 5mn-6mn 2007
    * Assuming 25% concretisation and Minimum usage of 1700 tonnes of cement for any road and 2700 tonnes of cement used for a fully concretized road.

    The cement industry has been lobbying for increased use of cement for these highway and road projects by citing the inherent advantages in doing so. Cement provides increased strength and hence provides a longer life for the roads. What is noteworthy is the fact that the Government has been able to arrange the funds for these projects in time. The total funding requirement for National Highway Development Programme (NHDP) projects is about 540 bn. Financial closure is expected in FY03. National Highway Authority of India (NHAI) had proposed to meet the funding requirements by financing mechanisms like budgetary allocations from the Government, cess on diesel and petrol, loan assistance from funding agencies and private sector participation.

    Another key infrastructure area is housing. About 60% of the cement demand is accounted for by housing. The housing sector in India is suffering from a demand-supply mismatch. The total shortage of housing units both urban and rural is about 19.4 million units. A good measure of the growth in the industry is the growth in disbursals of housing loans. The total disbursal of housing credit in FY01 was about 263 bn up 28% over FY00. The disbursals are expected to grow at 35% in FY02. The rural housing sector is also booming with 175,000 housing units expected to be built in FY02 of which 100,000 units have already been built. The target for FY03 is 225,000 units. All the above figures indicate that there is immense potential for the housing industry to grow if right conditions are provided.

    Though the government has not announced any significant sops for this sector, some indirect measures may give a fillip to demand. The increased focus of the government towards the rural economy coupled with a 5.4% growth in agricultural output may lead to increased demand for housing from the rural sector. The low interest rate scenario has further lead to increased off take of housing loans.

    The cement industry will benefit from the increased focus of the Government towards the infrastructure industry. The highway projects will ensure a consistent demand of about 3-4 million tonnes of cement for the next 3-4 years. The housing sector demand will further fuel the demand for cement. All in all, this budget has given the cement industry a good medium to long-term boost to demand. The cement industry at present is going through one of its most difficult times with a huge demand supply mismatch and cartel members trying to under cut prices in order to gain market share, thus negating the benefits of consolidation. Though the short-term picture for the cement industry does not look good, this industry is likely to recover in the medium to long term on the back of strong demand in the coming years assuming no additional capacity comes on stream.

     

     

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