The Indian cement sector will add 150-160 million tonne per annum (MTPA) capacity in the five years starting this fiscal, through both organic and inorganic routes, with an eye on anticipated demand growth in infrastructure and housing and in a bid to capture market share in a highly fragmented and competitive industry.

In the last five fiscals, the industry added 119 MTPA capacity to reach a total of 595 MTPA.

As much as 70-75 MT of the capacity addition is expected to be commissioned next fiscal, with 50-55% concentrated in the eastern and central regions. Large players will account for 50-55% of the planned capacity addition.

Robust demand in the past two fiscals¹ has bolstered the balance sheets of large players and some mid-sized ones² with strong market presence, prompting them to expand capacity on the back of healthy cash accrual and credit profile.

This fiscal, demand is projected to grow 10-12%, driven by government push to affordable housing and pre-election spending on infrastructure.

That said, incremental supply and heightened competition will limit price growth to 0-1%, maintaining prices at Rs 390-395 per 50 kg bag, and keep utilisation at 70-75%.

Next fiscal, CRISIL MI&A expects demand to grow a moderate 4-6% on a high base of the previous three fiscals. Also, rising raw material cost and a flat base will lead to an uptick of 1-3% in prices to Rs 400-405 per 50 kg bag.

Says Miren Lodha, Director-Research, CRISIL Market Intelligence and Analytics, “Cement prices slipped marginally, by ~1%, during April-December 2023, marking a trend reversal after four years of growth between fiscals 2020 and fiscal 2023 at a compound annual growth rate of 4%. With cement makers adding 35-40 MTPA of capacity this fiscal, the highest in more than a decade, and acquired capacities being ramped up, a significant increase in supply would test market discipline and restrict the increase in prices to only 0-1%.”

CRISIL MI&A Research forecasts a 13-15% correction in power and fuel costs this fiscal on the back of softening crude oil³ and coal prices. Prices of petcoke and imported non-coking coal⁴ - key fuels used for making cement - have softened ~30% and ~50% on-year, respectively, as of December this fiscal.

Freight expenditure is also expected to slip 0-2% because of higher volume and moderation in diesel prices.

Says Sehul Bhatt, Associate Director-Research, CRISIL Market Intelligence and Analytics, “Softening of power, fuel and freight costs, which account for ~50% of the total production cost, has provided a breather to manufacturers amid steady realisations. Hence, lower costs, steady prices and healthy volumes will expand the sector’s operating margin by 300-350 basis points (bps) to 16.5-18.5% this fiscal. The rebound in profitability comes after a contraction of ~620 bps last fiscal due to higher petcoke and coal prices.”

Skyrocketing energy costs over the last two fiscals hurt profitability and balance sheets of players. This led to consolidation in the sector as large players acquired those struggling to compete amid high costs.

The capacity share of large players increased to ~48% in fiscal 2023 from ~45% in fiscal 2018. A slew of mergers and acquisitions in the sector over this period resulted in a transfer of 110-115 MTPA capacity, of which large players acquired 43-45 MTPA. Further, their organic capacity addition stood at 50-52 MTPA.

The pace of consolidation has accelerated this fiscal, with more than 20 MTPA of capacity acquired over April-December 2023. This trend is likely to persist as players continue expanding capacity.

¹ Cement demand grew 8% in fiscal 2022 and 12% in fiscal 2023.
² Large players are defined as players having an installed capacity greater than 30 MTPA.
³ Crude oil prices declined ~17% on-year during April-December 2023
⁴ Domestic petcoke prices are ex-factory Gujarat prices and imported non-coking coal prices are Australia, Indonesia and South Africa average prices.