India’s cement companies are expected to add 58-62 million tonne of capacity through fiscal 2020 – or ~1.6 timesincremental demand growth expected in the period -- on healthy demand growth and aggressive expansion intonew geographies in a market share quest.
The consequent demand-supply imbalance would be the most pronounced in south India because 18 milliontonne of capacities are coming up over next two fiscals there, or 2.5 times the expected incremental demand.West and north would also see such distortions.
To boot, half of the capacity additions would be by cement makers already facing sub-optimal utilisation (it’s below65% for a third of them, and at 65-70% for a fifth). Only 14% would be by those with utilisation level above 80%.
Consequently, and despite healthy demand growth of 8% expected this fiscal because of low-base effect, the bigpush to affordable housing, and pre-election spending on infrastructure, utilisation rate in the industry wouldcontinue to wallow below 70%.
Last fiscal, while demand grew by 9%, prices edged up only 4% with the major rise occurring in the first halfbefore the Goods and Services Tax kicked in. In the second half, despite robust demand, prices slid sharplybecause 85% of the capacity additions of last fiscal was commissioned in the period. Additionally, acquired assetswere also ramped up to some extent.
Prices had also fallen in fiscals 2016 and 2017 along with utilisation rates of clinker and grinding units.
“With cement makers wanting to expand into newer regions / markets, and 25 million tonne of acquiredcapacities also being ramped up, prices would remain subdued relative to demand growth even in fiscal2019,” said Prasad Koparkar, Senior Director, CRISIL Research, “While prices could rise from here, amaterial increase in supply would test market discipline and restrict the increase to 2-3% only for thefiscal."
In the first quarter of this fiscal, despite a healthy 13% on-year growth in demand, prices were range-boundsequentially and down 6% on-year. The decline was sharpest in the south followed by north and east, becauseof demand-supply imbalance in the past few quarters.
Players have increased the share of premium brands to neutralise the impact of price decline in mass brands ontheir realisations.
During the first quarter, elevated petcoke and diesel prices also culled the sector’s profitability by 300-350 bps.
“Sticky cost base, especially power, fuel and freight, amid very inadequate rise in realisations, wouldcontract spreads once again this fiscal after the 90 bps compression seen in the last fiscal. We expectoperating margins to contract by 100-150 bps this fiscal,” said Rahul Prithiani, Director, CRISIL Research.