Excess Capacities & Higher Input Costs

to hurt Indian Cement Industry in 2012

The long term growth story for the Indian Cement sector is positive, even if the country's GDP was to grow at a moderate seven per cent per annum. Demand for cement in India has the potential to grow at eight to ten per cent per annum over the next few years if infrastructure investments take off and interest rates begin to come down from the second half of 2012.

The year 2012 will prove to be a difficult year for the industry due to excess capacities and higher input costs. Cement production capacities at over 300 million tpa currently are significantly higher than the 220-240 million tpa demand projected for 2012. Supply is expected to outstrip demand for the next two years, as an incremental cement capacity of around 75 million tpa is going to get added, most of which will be in the south and central regions.

In our assessment, costs for cement companies will keep rising over the next few years as coal prices will firm up further and freight costs go up due to rising crude prices. New cement capacities may face the additional problem of not getting assured captive coal linkages.

Cement despatches have been flattish for the last two years at around five to six per cent, and clear signs of improvement are not visible just yet. In the absence of accurate lead indicators of future demand, we believe that demand off-take may not improve soon. It may be noted though, that while cement despatches have been strong in the west and the north, the all-India figures are lower due to low despatches from the major consuming states of Andhra Pradesh and Tamil Nadu.

In fact, the cement arrivals in Gujarat during December 2011 were the highest ever. At 18.55 lakh tonne for December 2011, the arrivals surpassed the previous all time high of 16.87 lakh tonne posted in March 2011. Gujarat witnessed a 30 per cent jump in demand for cement from 14.23 lakh tonne in December 2010, and it was higher by 11 per cent over the previous month i.e. November month arrivals of 16.67 lakh tonne. For the nine months period ended 31 December 2011, the cement arrivals in Gujarat stood at 130.14 lakh tonne, an 18 per cent increase over 110.23 lakh tonne for the previous nine months ended 31 December 2010.

Demand for cement is driven largely by Real estate construction, which accounts for about 60 per cent of cement consumption. The infrastructure sector accounts for another 20 per cent, and the remaining is consumed by the Government, which includes central and state governments. The demand for cement in India has been generally growing in line with the GDP growth rate or a little higher than that. But, in the recent past, cement demand has lagged behind the GDP growth rate due to the tight monetary policy. Operating cash flow is expected to deteriorate for the overall industry, and those companies that have undertaken debtheavy capital expenditure, are expected to experience higher liquidity pressure.

The spurt in interest rates over the last two years and higher prices of real estate projects have led to a significant slowdown in the Realty sector, and this in-turn has hit the consumption of cement. Simultaneously, the Cement sector has also been hit by a slowdown in the overall off-take by the infrastructure and government sectors. While growth in real credit to fund infrastructure and road development affects cement demand with a lag of six to nine months, credit growth to the construction sector has a more immediate impact on cement demand.

Transportation cost, which accounts for 25 to 30 per cent of the total cost, has been increasing due to recent increase in rail freight rate and a moderate increase in road freight. Power and fuel costs, which are 30 to 35 per cent of overall cost structure, have risen by 20 per cent in the recent past. Global coal prices have increased from $112 a year back, to around $126 per tonne currently. But, the significant depreciation in the rupee in the last seven to eight months has severely hurt many cement companies, which are dependent on imported coal.

On the other hand, there are encouraging factors like increasing demand from the government, institutional, and infrastructure segments. The long term growth potential is huge as the per capita consumption of cement in India is a meagre 230 kg as against 1,380 kg in China (as of 2010-11), and the world average of 500 kg plus. This huge potential is attracting all global cement majors; some are already there and more are looking at entering India in the near future.

The Indian Cement industry is the second largest after China, with a total capacity of about 300 million tonne as of financial year ended 2010-11. The growth prospects for the Cement industry are directly linked to the overall growth in India's economy, Real estate and Construction sectors.

India's economic growth has slowed down in recent times on account of rising inflation, higher interest rates, higher prices of commodities and fuels and more. A slowdown in the Real estate sector too has taken place. If it persists for an extended period, it would impact the growth in consumption of cement. To top it, the industry has witnessed significant capacity additions in recent times, which will continue over the next few years. This will lead to over-supply in the market and result in a constant pressure on realisations.

The long-term cement demand in the country is expected to remain intact. Going forward, cement demand will largely be driven by the increased focus of the government on the infrastructure development and promotion of low-cost affordable housing in the country. The measures announced in the last budget also indicate continued support of the government to the affordable housing segment, which will help the Real estate sector to continue its growth momentum, and in-turn cement demand.

Cement demand is expected to pick up as government expenditure on infrastructure projects catches momentum. Government of India has envisaged investment of billions of dollars for infrastructure development under the 12th Five Year Plan.

Alok Sanghi, Director, Sanghi Industries   "Alok Sanghi, a Business Management Graduate from Indiana University, USA joined his family business, Sanghi Industries Ltd. in 2005 as Director and looks after corporate and strategic affairs of the company. During his stay in the United States, he was associated with renowned organizations like Merrill Lynch and Regency Securities. Under his able leadership the company has completely changed the conventional ways cement was marketed and sold in India. He has explored several international markets for cement exports and has led the company to be one of the leading bagged cement export companies of India. The company has also won many awards for its export activities. Alok Sanghi is actively associated with CII's Young Indians (Yi) Chapter - an organization involved in various social upliftment activities. He is also a member YPO (Young President's Organization) and is also associated with the Lions Club."