Cement cos may go in for output cut

COPING WITH THE SLOWDOWN

The domestic cement industry, aloof, so far, from production cuts, has started feeling the heat of piling inventories. A few cement makers may trim production on lacklustre buying.

Amid slowing vehicle demand, the country's leading auto makers recently announced plans to go in for a temporary shutdown of their plants and production delays.

Increasing gap between production and despatches, softening of cement prices and inventory level inching towards 2 million tonne have now started pinching the cement makers, who are undergoing huge capacity expansion.

H M Bangur, president of Cement Manufacturers' Association and chairman and managing director of Shree Cement, said, "Some individual companies, especially those which are inefficient and cannot sell their produce, might go for voluntary cuts in production. So, technically speaking, there will be cuts. However, the industry as a whole will not go for cuts as demand is not down and sales are up 7 per cent compared to last year's."

The 205-million tonne cement industry added over 30 million tonnes in FY08 and is set to add a similar capacity in the current financial year to take the overall capacity to around 230 million tonnes. However, cement demand is low with growth at 7-8 per cent against the anticipated 10 per cent.

A L Kapur, managing director, Ambuja Cements, said, "The industry is facing inventory pressure on both cement and clinker fronts. Sales are not in proportion to despatches, as a result warehouses — which have a limited capacity — get full. Production cut is a possibility but the decision will rest on individual companies, depending on regional demand. Let us see how much patience one has with rising inventories."

In October, the cement industry witnessed a despatch growth rate of just a little over 4 per cent. In the month, inventory was close to half a million tonne — one of the highest in the last few years. So far in the current financial year, the industry produced 101.04 million tonnes of cement whereas despatches (including exports) stood at 100.24 million tonnes.

T Venkatesan, chief executive officer of the South-based Dalmia Cement, said inventory pile-up was bound to happen.

"Nobody wants to spend or preserve the money as there is a fear psycho," he added.

Binani Cement has started exporting clinkers to its Dubai plant in order to eschew inventory build-up. The company's managing director, Vinod Juneja, said, "Companies which have their plants in the hinterland cannot export and may have to suffer."

According to a Mumbai-based cement industry analyst, "If the difference in consumption and despatches remains there for another one to two months and inventory crosses 2.5 million tonnes, cement makers, in line with the auto industry, will have no other option but to cut production."

Cement — which takes around 10-15 days in the supply chain from manufacturers to users — as a commodity needs to be consumed within a month. Else, the quality of the building material deteriorates and is not usable.

Though the capacity utilisation has dropped to a four-year low of 82 per cent in the September quarter this year, it can be attributed to fresh capacities being added. For the first seven months of FY09, capacity utilisation stood at 85 per cent against 93 per cent during the same period last year.