Let’s take just one aspect of construction – roads. Over the next decade, the government will complete two major road-making initiatives: the “Golden Quadrilateral” and “North – South – East - West Corridor”. Under these programs, strengthening and four laning of nearly 13,000 kilometers of roads will be undertaken. Given that 2,500 tonnes of cement are consumed per kilometer of a four-lane highway, this translates into additional demand of 32.5 million tonnes! Not bad for an industry, which has an existing capacity of just under 120 million tonnes.
Apart from these programs a massive thrust is being given to the housing sector and road infrastructure in rural areas. Overall demand for cement in the domestic economy is anticipated to grow at 8% in the coming years. By some estimates, consumption of cement will top 200 million tonnes by 2010, as against 93 million tonnes in 2001. But is the cement sector celebrating? Not yet.
The construction story has always been there. However, time and again, demand has fallen short of expectations, as either the government did not have the resources to fund construction or a slowdown in the economy suppressed private sector demand. The result was a glut in supply, as capacity was built in anticipation of a boom in demand. Indeed, excessive supply suppressed prices leading to large-scale losses early last year. ACC, India's largest cement company, posted a loss of Rs 590 m in FY00.
However, things may be beginning to look up for the cement sector. Capacity additions have slowed down as low realisations have reduced the incentive to invest in fresh capacity. Also, demand from the road sector is finally showing up. Coupled with demand from housing sectors and reconstruction demand from Gujarat (anticipated at a total of 6 million tonnes in FY02 and FY03), the sector may finally be set for better times.
But there is one glitch. It is not the improving demand-supply scenario that is responsible for the recent improvement in the profitability of the sector. It’s cartelisation. Leading cement manufacturers have come together in an effort to boost cement prices, and indeed, they have met with considerable success over the last eight – nine months. This is amply clear from the financial performance of ACC over the last five quarters (a part of the improvement though has to be attributed to the cost cutting efforts initiated by the company).
The biggest worry for the cement sector today is whether the cartel will hold up or not. If it does, managed supply will ensure that companies continue to operate profitably. Any break up in the cartel will almost surely result in a large fall in the now artificially inflated prices, thus denting profitability significantly.
The fortunes of the cement sector are inextricably linked to the performance of the economy. As the economy picks up pace (due to the monsoon), the cement sector should be a key beneficiary. However, whether this growth will be profitable will be determined by the survival of the cartel.
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