Cement fortunes to improve on infrastructure and housing push

Unseasonal heavy winter rains damaged standing wheat and other crops in about 10 million hectares in northern and central grain-growing parts of the country. As the setback in rabi harvest has left farmers and village-level traders in agri-commodities in major financial stress, the plans for building or repairing pucca dwellings and storehouses are likely to be delayed.

The resultant fall in demand for cement saw net profit of industry heavyweight Ambuja Cements, a subsidiary of Switzerland-head-quartered Holcim, in the March quarter wilting 38.9 per cent to Rs 318 crore. The company, like its peers, saw a negative growth in volume and turnover during the January-March period. Besides contraction in rural demand, weak government spending in infra projects and loss of buoyancy in real estate development in urban centres had a telling effect on cement sales. Unsold residential units in six major cities were up 2.48 per cent in the March quarter when new supply increased 21 per cent. What is particularly upsetting for the cement manufacturers was the start of new residential building construction down by half in Mumbai region in 2014. Builders say inquiries have improved of late, but they are waiting for these to be converted into confirmed bookings.

GAINING GROUND

• Activity in the housing sector, which accounts for about 65 per cent of the country’s cement consumption, is expected to get a boost with every fall in interest rates
• Cement demand in 2014 grew six per cent to 264 mt against the capacity of 360 mt
• How the monsoon will behave remains a concern

According to UltraTech Cement Managing Director O P Puranmalka, the commodity suffered a 'single-digit decline' in the last quarter, but volume contraction in March alone was between 15 and 18 per cent. April saw some improvements in cement use but nothing to cheer about on a year-on-year basis. On top of all this has come India Meteorological Department forecast of below-average rainfall that could result in worsening of agrarian economy and price inflation.

Activity in the housing sector, which accounts for about 65 per cent of the country's cement consumption, is expected to get a boost with every fall in interest rates. However, the Reserve Bank of India will perforce tread cautiously in case spikes in food prices follow any setback in farm production. Cement demand in 2014 grew six per cent to 264 million tonnes (mt) against the capacity of 360 mt. How the monsoon will behave remains a concern. Even then, cement manufacturers pinning their hope on renewed thrust on infrastructure development, creation of 100 smart cities and roads concretisation expect some improvement in demand in 2015 over the past year when the country had sub-par monsoon.

Paradoxically, although an emerging economy, Indian cement sector's capacity utilisation remains below 70 per cent. The problem here is not with leading 20 groups armed with strong brands and accounting for almost 70 per cent of cement production. But single-unit groups with the capacity of up to two mt fare poorly when demand slides and they are not able to command premium prices unlike industry leaders enjoying brand equity. In fact, they remain targets for takeovers for capacity consolidation to make further progress. For example, UltraTech's recent acquisition of two cement units in Madhya Pradesh with a combined capacity of 4.9 mt from Jaypee group. India's per capita consumption of cement at 190 kg compares poorly with China's 1,581 kg, South Korea's 911 kg and Brazil's 330 kg. Such high per capita consumption is indicative of actual investment made in infrastructure development and urbanisation. The higher the per capita GDP (gross domestic product), the more is the per capita use of cement in an emerging nation. The per capita use of cementing material in countries such as the US, Germany and Japan with highly developed infrastructure, therefore, is between 250 kg and 350 kg.

India's 12th five-year Plan proposed $1 trillion investment in infrastructure development. Unfortunately, since the United Progressive Alliance government became increasingly weak in its second term, most big projects requiring hosts of sanctions remained stalled. The Modi government is making attempts to get some of these projects off the ground as it wants to create smart cities across the country. The government's implementation and the encouragement it gives the private sector to play a bigger role in infrastructure building should result in better use of cement capacity. An industry official says: "Ideally, the country's cement demand should be growing at a double-digit rate in view of deficit in infrastructure and dwelling units. Building cement capacity of 500 mt and more should not be a problem. Limestone and coal, the two important raw materials for making cement, are plentifully available here." But Coal India must ensure that cement manufacturers get full amount of linkage coal. And why should we allow duty-free cement imports when our own capacity is idle?