India's 390-million-tonne (mt) cement sector, world's second largest after China, is not out of the woods yet. A gross mismatch in demand and its capacity to supply continues to haunt the industry.
After registering a single-digit growth rate for the last five years in a row, the current financial year too is likely to end at not more than four-five per cent, if the current scenario is any indication.
However, if some sector experts are to be believed, the year could be a complete washout for the cement players, as they do not see demand growth at more than three per cent in FY16. And if this happens to be true, the year will be the worst year thus far this century for the sector.
Consider this: The first two months of the current financial year, on a cumulative basis, has witnessed a mere growth of one percentage. This is worse than what the sector saw in the second half of FY15 at about two per cent.
On the ground level, there is no demand for the building commodity - be it from housing, road or industrial projects. This is quite reflecting on the falling prices of cement thus far this financial year. For instance, the current average all-India cement price is ruling at Rs 288 for a 50-kg bag against Rs 293 a year before. In the March-end, the prices were at Rs 302.
“Prices had seen a steep increase in the quarter ended March, on expectations of demand rise. However, it could not sustain as demand failed to pick up,” said Piyush Jain, research analyst at Morningstar India.
He further added that first half of FY16 will be quite tepid and even in the third quarter there might not be a reasonable increase in demand. “We see initial sign of pick up in demand only in the fourth quarter of this financial year when orders for road projects and construction get translated into execution,” he said.
In the previous financial year, 2014-15, growth in cement demand was estimated at 5.5 per cent against initial expectations of seven-eight per cent.
The northern market is witnessing a huge pressure on prices. The average retail price of cement in the region has slipped to Rs 227 a bag against Rs 262 in the March quarter. The current prices being quoted in the West is Rs 279 (Rs 307 in March) and in East it is Rs 316 (Rs 314). The southern region is commanding the highest cement prices at Rs 368 (Rs 371) while the prices in central India is about Rs 247 (Rs 259).
According to sector analysts, situation is likely to improve only in FY17 when government-led projects are expected to be in execution mode.
The sector is struggling with mismatch in demand and supply for more than half-a-decade now. The capacity utilisation is declined to 70-72 per cent. Against a standing capacity of 390 mt, current year cement consumption is being estimated to be around 280 mt. This, effectively, means that nearly 110 mt of capacity is lying unutilised.