Cement utilisation improves as capacity addition returns

The cement sector is seeing a comeback of fresh investment as capacity utilisation scales up. Industry officials and analysts say new investment plans anticipate that utilisation will peak by 2019-2020.

Demand recovery in certain regional pockets are pushing fresh investment.  

Dalmia Bharat announced plans last month for a plant in Odisha in a bid to add eight million tonnes (mt) to its East India capacity.

“Looking at the demand for our premium products, we decided to add capacity and strengthen our leadership in East India. For the industry, utilisation rates are improving and demand had picked up December onwards. We are seeing a revival of this kind after three to four years,” said Mahendra Singhi, group chief executive officer for Dalmia Bharat.

Industry officials and  analysts say at least half a dozen cement companies are at various stages of announcing or implementing expansion plans. East India, North India, Andhra Pradesh and Telangana are some markets showing signs of capacity addition.

In December, there were news reports that JK Cement planned to add up to eight million tonnes per annum capacity in the next five years, taking its total  to around 18 for grey cement.

In February , Ambuja Cements said it would invest Rs 13.9 billion to set up a 3.1 million-tonne clinkerisation plant in Rajasthan. 

As a thumb rule, capacity utilisation of 80 per cent is seen as a good stage to start planning new investment. Companies frame  investment plans to ensure market share is retained. “The average utilisation for some regions is now 80 per cent. The expectation is that capacities may be exhausted in the next two years, making it a good time to start fresh investment,” said an analyst with a fund house, who did not wish to be named. 

Officials from  the capital goods sector agreed cement was one of the main segments showing early sign of revival in investment in capacity addition.  

According to a Prabhudas Lilladher note on the sector, there is a surge in new capacity addition, with about 45 mt likely to come in between this financial year and the next.

Analysts add companies were preparing for expansion in the past two years and getting converted into expansion plans. "Higher utilisation is one reason for companies like Dalmia Cement to add capacity, however for certain others, it is a combination of wanting to retain and grow market share in specific regions," said an analyst with a domestic brokerage.

According to ratings agency ICRA, “Going by the prevalent trends, the growth momentum in cement production is expected to continue in financial year 2019 and the industry is likely to report growth of six per cent. In FY18, production registered a growth of 6.3 per cent at 298 mt, as compared to 280 mt in FY17, with the bulk of growth during the second half of FY18.”



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