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Cement: Disappointing yet again

Sep 6, 2000

Once again the cement sector has belied hopes that a recovery in demand is around the corner. During the month of August, production and dispatched have declined 2.2% and 4% respectively. On a cumulative basis (April August), however both production and dispatched grew 3.5% and 3.6% respectively. The cement sectors woes stem from various reasons. Lets tackle demand first. The per capita consumption of cement in India is 90 kilograms as compared to a global average of 250 kilograms. This underscores the fact that there is tremendous potential for growth. Indeed in FY00, demand for cement grew 15%. However FY01 is proving to be a disappointment. First, companies were hurt by the drought that hit several states. Now, it seems to be a problem of floods in Andhra Pradesh. These factors have subdued demand for the commodity resulting in lower than anticipated growth. However, as the sector puts these woes behind it, it is likely that demand will once again come back on stream. We are anticipating most cement companies under our coverage to log in a volume growth in excess of 9%.

The next issue is that of price. Despite a fear of sounding repetitive it is necessary to mention that the cement sector is nearing a situation of where capacity matches demand. This should ideally benefit producers in terms of higher realisations. However, as we know this is not the case. The key factor to blame is the high level of fragmentation in the sector. This has led to excessive competition among players, which are largely interested in stepping up volumes rather than margins. Also, the recent drop in demand for the commodity has created a situation of excess supply. As a consequence, cement prices have failed deliver.

In the coming weeks the cement sector will face a major challenge when diesel prices are revised upwards. Companies could take a hit if they are unable to pass on the rise in costs to consumers.

The cement sector has failed to deliver on many counts. However, there is anticipation that the sector will finally be able to put its ills behind it once and for all. The rising consolidation activity and the booming construction sector are only two indicators that indicate a better future.

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