Cement sector, catering to the housing, infrastructure and construction sector is a reasonable proxy for the country's economic growth. Over the last decade, the demand of cement in the country has grown at 1.2 times the GDP growth. Riding on the housing and construction boom and Indian growth story, many cement makers added massive capacities. As such, the cement production in the country doubled since 2007. Unfortunately, growth has not kept up with the pace. Currently, the sector is suffering from capacity underutilization with around 30% of the capacity lying idle.
The Indian cement industry has been facing some headwinds for some years now. Apart from excess capacity, the slowdown in demand and increase in input and operating costs (especially freight and power cost) has eroded the pricing power significantly. The weakness is being witnessed across the country. Barring the west, all regions have seen a price decline to some extent. As per an article in Business Standard, average price that a bag of cement can fetch in the country has fallen by 4.5% in the last one year. This slackness in demand and weakness in pricing is witnessed in the peak consumption period, thereby adding to the concerns of cement manufacturers. Even the large cement manufacturers, often alleged for cartelization have not been able to escape this time.
So what lies ahead for the cement sector? The per capita consumption of cement in India still remains low when compared with the world average. Given the huge untapped housing demand and positive demographics, the long term growth prospects of the sector are intact. That said, there is little that one can expect in the near or medium term to counter the impact of current challenges and change the fortunes of the segment.