The Indian cement industry, struggling with oversupply, saw capacity utilisation fall to a 13-year low of 83.9 per cent for 2010-11, according to the Cement Manufacturers Association.
In the past decade, manufacturers have enjoyed an average utilisation of 90 per cent; it was 96 per cent in the past five years. The industry added capacity of 82 million tonnes per annum (mtpa) in the past two years, taking the total to 290 mtpa.
Analysts say the glut is felt more in the western and southern regions than the north, central and east (NCE). In the west and south, capacity utilisation fell to 75 per cent in 2010-11, as compared to 92 per cent in 2008-09. Manufacturers, especially in the south, have tried to maintain a cap on output in the past seven months. Production this April for the country was 14.5 mt, as compared to 14.7 mt in the same month a year before.
Says an analyst from a domestic brokerage on condition of annonymity, “Capacity utilisation in the NCE region was 88 per cent in FY11 as compared to 97.8 per cent in FY10. Also, the north has seen growth of a mere two per cent in the last fiscal. The pick up from the real estate sector is lacklustre. Hopefully, the run up to the elections in Uttar Pradesh will kick in some consumption. Even the golden quadrilateral project is delayed, as is the Yamuna Expressway. The Japanese government was going to invest in our infrastructure projects, which is not happening as yet. Thus, the kicker for consumption of cement is very low but it is still better than Gujarat, Maharashtra and southern states, where everything is near a standstill.”
The production discipline hasn’t been enough to sustain prices any more. In April and May in the northern region, these fell by Rs 10-15 per 50 kg bag, bringing it down to Rs 275 per bag in Delhi. With no capacity additions lined up for the east this year, the central and northern states are expected to take advantage of incremental supply. The southern states all hit their peak pricing this month.
Says a dealer based out of Chennai, “The pricing is not based on demand consumption but all the players, in consensus, have increased the prices becasue this year we expect monsoons to be on time, so prices will start falling from early June, as construction activity will stop. At present, the price is around Rs 285 per 50-kg bag for non-trade in Chennai.”
A note from Alchemy Shares said, “We maintain our negative view on the sector, especially in light of the huge risk of price hike unsustainability in the south, where prices are not backed by demand. This would imply lower utilisations in the region at current prices. Cement prices had seen upward movement since January and is tapering off now. Weak demand in the north has led to a similar situation there, with production discipline and supply constraints helping to sustain the prices.”
