Cement companies on a capacity expansion spree; price rise uncertain

Bullish on a demand surge and higher market share, the country’s cement manufacturers are on a capacity expansion spree. However, with the possibility of a price rise being uncertain, analysts and dealers are not sure if 2019 will be any different.

At present, almost every cement major in the country has announced a capacity expansion plan, including Aditya Birla Group’s UltraTech Cement, ACC, Ambuja Cements, Ramco Cement and Shree Cement. “We are adding grinding capacity, which is a means to save costs. At an industry level, greenfield expansion has been planned on the premises with the hope that long-term utilisation with improve,” said H M Bangur, managing director for Shree Cement. The company is adding two new grinding units of 5.5 million tonnes per annum (mtpa) capacity and another grinding unit of 2 mtpa in Pune, according to analyst reports.

Mahendra Singhi, president of the Cement Manufacturers’ Association, said that the overall utilisation of cement capacity still remains low, at 70 per cent. “However, there are certain pockets where utilisation levels are better. This gives companies the confidence to add fresh capacity, which is largely brownfield. 

Demand is expected to rise in the coming year. We expect FY19 to see an 8 per cent growth in demand. In addition, long-term growth story (five years and above) for the cement sector looks positive,” Singhi said.

Sources: Analyst reports, company releases & annual reports
Ramco Cements is another company that is setting up a 3.15 mtpa greenfield cement plant in Andhra Pradesh, along with a clinker capacity of 1.5 mtpa and grinding capacity of 1 mtpa. “We wanted to expand to the East, and we need to take the clinker from Andhra Pradesh to the East for this,” said A V Dharmakrishnan, chief executive officer of Ramco Cements. Singhi expects around 20-25 million tonnes (mt) of fresh capacity to be added in FY19 and another 20-25 mt in FY20. 

Even as companies add capacity on the back of expected rise in demand, a hike in cement prices continues to be elusive. “For 2018, the cement sector saw a rise in demand, but prices have not matched due to competition among cement makers to increase market share and capacity utilisation. For instance, UltraTech did that for the asset it acquired from Jaiprakash Associates,” said an analyst who did not wish to be identified. In its statement last week, Ambuja Cements announced plans for an additional clinker capacity of 1.4 mt and grinding capacity of 1.8 mt in Rajasthan. “This project will allow the company to strengthen its market presence,” it said in its statement.

Analysts with Ambit Research, in a November 19 note on the sector, had said, “Cement prices, after the hikes taken in April 2017, largely remain flat for past 15 months now. In 2QFY19, prices were down 3-4 per cent in the southern markets and 5-8 per cent in West India. But a 12 per cent rise in prices in Uttar Pradesh and Bihar helped the industry maintain a stable trend.

Cement prices saw a marginal rise at the start of December; but dealers from different markets remain skeptical as to whether higher cement prices could be a possibility. “There has been a Rs 10 per bag hike in cement prices this month,” said a Gujarat-based dealer. Another National Capital Region-based dealer said, “There has been a Rs 10 per bag hike in December, which has come after a long time. Most of the demand is from the road construction sector, which does not allow much scope for a price hike.

A Hyderabad-based dealer said cement prices have fallen from Rs 295 per bag in March to Rs 250 per bag in December. “I expect a hike to come in February, but that may not be sustained,” he added.

Some analysts expect companies to look for a hike in the coming year. “We expect 16-17 mt capacity addition every year till FY22. Despite an increase in additional capacity, the demand growth will remain strong and exceed supply growth. Cement makers may look to increase prices in January 2019 after a failed attempt after Diwali,” said Binod Kumar Modi, senior research analyst at Reliance Securities.

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