Cement industry eyes demand revival amid looming capacity surplus

The lagged impact of fuel price increases of Rs 50-100 per ton during January-April'25 will be seen in H1FY26 given inventory, with higher exposure to petcoke usage impacted more

The cement industry continues to suffer from weak demand and surplus capacity although Q4FY25 indicated a marginal improvement. Demand grew in low single-digits year-on-year (Y-o-Y) from April to May 2025 owing to unseasonal rains in certain parts of the country.

 

Price hikes of ₹40 per bag in South India, in April 2025, were largely sustained before dropping by about ₹10-15 per bag this month.

 

East India also saw a hike of ₹10-12 per bag during April-May'25, while other regions were flat. Average India prices are higher by 3 per cent quarter-on-quarter (Q-o-Q) and 4-5 per cent Y-o-Y during Q1FY26 so far, the highest in 18 months. Hence, margins may be sustained. 

 

The average profitability has been between ₹ 700-900 per tonne (₹800 per tonne in FY25) since FY11 with single-digit return on capital employed or RoCE while consolidation continues alongside capacity expansions. Management guidance for demand growth in FY26 of most companies was in the range of 6-7 per cent.

 

The lagged impact of fuel price increases of ₹50-100 per tonne during January-April 2025 will be seen in H1FY26 given inventory with higher exposure to petcoke usage had a bigger impact. However, the recent decline in fuel prices with prices back to pre-January 2025 levels may ease costs in H2FY26.

 

Average operating profit per tonne for some companies may rise from ₹850 per tonne in FY25 to ₹1,070 per tonne in FY26 given the cost efficiencies and higher realisation. 

 

Early monsoon and demand weakness may lead to some downwards pressure on prices. Given the policy focus on infra and housing projects, and better rural demand, volume growth of 6-7 per cent is expected.

 

International petcoke prices are now 7 per cent lower than the average price in Q4FY25.

 

In Q4FY25, management commentaries suggested sustainable cost savings potential of ₹150-200 per tonne through FY26 and FY27.

 

The aggregate operating profit of large listed companies grew by double-digits Y-o-Y with operating profit per tonne rising by 30 per cent Q-o-Q to ₹1,099 per tonne.

 

The average Q1FY26 cement spread is at ₹2,652 per tonne, up ₹171 per tonne Q-o-Q, as prices have increased Q-o-Q. 

 

If global fuel costs remain stable or trend down, this is a positive for the cement industry. Volume growth may improve slightly with an annual growth of 7 per cent over FY25-27 versus 4 per cent over the past decade and companies have adopted sustainable cost saving measures to reduce operating expenditure such as reducing thermal consumption and increasing green power.

 

In FY25, the cement industry ended with a capacity of about 655 million tonnes per annum (mtpa), up 4.8 per cent Y-o-Y.

 

Companies like Ultratech, and JK Cement saw volume growth of 16.9 per cent and 14.6 per cent Y-o-Y respectively owing to demand bounce and newly acquired assets. Ambuja also grew volumes by 12.7 per cent while Ramco (down 5.3 per cent Y-o-Y) and Dalmia Bharat (down 2.3 per cent) were disappointing. Realisations were down 3.4 per cent Y-o-Y and 1.9 per cent sequentially in Q4F25. 

 

Operating profit per tonne has witnessed a decrease of 2.5 per cent over Q4FY24 but a 5.8 per cent sequential rise as marginal fall in power & fuel costs and other operating expenditure shored up margins.

 

Dalmia Bharat (up 24.1 per cent) and JK Cement (up 17.4 per cent) witnessed the sharpest recovery in operating profit per tonne.

 

Energy costs have declined by 11–12 per cent January this year due to soft coal and Brent crude prices. Price hikes in April-May ‘25 could not be fully sustained.

 

Government capex accelerated towards the year-end, reviving construction activity. If consolidation completes, there could be better price discipline leading to a more profitable cycle.

 

Monsoon may lead to some demand softness and delays in project activity. In H2FY26, commissioning of new 60 mtpa capacity may be completed and that could lead to surplus over demand unless activity picks up strongly. Investors should remain selective with analysts recommending Ultratech, Shree Cement, Ambuja and JK Cement.