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Cement: Good year - Views on News from Equitymaster
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  • Jun 15, 2002

    Cement: Good year

    The cement industry is going through one of its better times. The cement demand in the country has grown to nearly 99 m tonnes a growth of nearly 10% YoY. The demand has picked up considerably in the last 4-6 months. As a result of increased demand the production has also picked up. The major cement producers are in a hurry to ramp up production in order to meet demand from various regions in the country. As a consequence, the dispatches have also been on the rise since the beginning of the year.

    While higher dispatches have been justified due to the high demand growth, the entire exercise has affected the realisations of all cement manufacturers. The realisations have been severely affected due to cement oversupply and this effect has been felt across the country. The last four months of FY02 have been particularly severe, as high dispatches have depressed prices further.

    The large dispatch growth rates are misleading to a certain extent as FY02 figures are compared to a lower base in FY01. But despite this no one can underscore the fact that cement demand in the country has gone up considerably in the past 4-6 months. The demand has mainly come from the housing and the infrastructure sectors. While infrastructure has played a key part in the current demand scenario, housing sector growth has been the major demand driver for the industry.

    A look at the regional demand scenario indicates that the northern and the eastern regions have reported healthy demand growth in FY02. The eastern region posted a 19% demand growth in FY02 while the demand in the northern region grew by 16%. The western region recorded a poor growth for FY02. This may partly be on account of the marginal growth in cement demand from Maharashtra (up 1% YoY), the largest cement market in India. Gujarat reported a 19% increase in its demand on the back of the reconstruction demand (post earthquake) in the state. The southern region also showed good growth in demand (nearly 9%). Andhra Pradesh and Karnataka were primarily responsible for demand growth in this region. Both the states recorded high rates of demand growth in FY02.

    Region FY01 FY02 Growth
    North 16.8 19.5 16.1%
    South 24.2 26.4 9.1%
    East 13.6 16.3 19.9%
    West 19.5 20.7 6.2%
    Central 16.1 16.0 -0.6%

    Realisations of major cement producing companies have come under increasing pressure. While ACC and Gujarat Ambuja have managed to offset this drop in realisations with higher volumes, Madras Cementís bottomline has suffered due to poor realisations and large growth in expenses incurred on depreciation and interest. Other cement majors like L&T and Grasim have also been affected due to oversupply in the markets. The average realisations have dropped by 12%. These price drops have been particularly severe in regions where there has been a significant capacity. For example in the western region prices were under pressure due to the commissioning of Gujarat Ambujaís new plant at Chandrapur in Maharashtra. Similarly, in the southern region commissioning of the new Wadi plant by ACC has put considerable pressure on cement prices in this region.

    The cement industry was plagued by overcapacity in FY02. Nearly 14 m tonnes of capacity was added in FY02 in anticipation of a healthy demand. Cement prices were the casualty. The outlook for the current year looks encouraging. Though additional capacities are expected, they are considerably less compared to FY02. The prices are expected to stabilise and gain in the third quarter, once the demand picks up post monsoon season. With the demand and supply mismatch set to contract in the current year the prospects of the cement industry look bright.



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