Cement demand fizzles out in 2019, recovery expected only in H2FY21

Growth in cement demand was significantly affected this year after no major recovery was seen in the sector. 

With no significant demand growth in sight in the near future, analysts expect growth to return only after the 2020 monsoon.

All India cement volume growth between April and September declined in the range of 2 to 4 per cent. The sector is expected to end both the calendar as well as the financial year with flat demand growth.

“The general elections in Q1, and subsequently, heavy rains in most parts of the country had taken a toll on demand consumption and even the latter part of the calendar year failed to put up an impressive show,” said Shailendra Chouksey, whole-time director for JK Lakshmi Cement.

India’s cement demand was expected to grow at the rate of 5 to 6 per cent for the full financial year. The confidence stemmed from a two-year strong growth rally. India’s cement demand growth story, however, fizzled out from April 2019.

“There has been a glitch in the smooth ride the industry experienced in the last 8 or 10 quarters till March 2019. Expectations of a slowdown post-election was in the offing, but such a sharp decline that we have seen is a surprise,” said Atul Dagga, chief financial officer (CFO) of UltraTech during the company’s September quarter earnings call. 

Dagga pegged the industry’s cement demand decline in the second quarter at 2-2.5 per cent, with only the northern market showing a positive growth rate. 

Demand growth, analysts say, is now likely to revive after monsoons in 2020.

“Cement demand was expected to grow at 5 to 6 per cent this year. But it has not happened. Demand was impacted first by liquidity constraint, slowdown in infrastructure development and later extended monsoon,” said Binod Modi, analyst with Reliance Securities.

He added, “A meaningful recovery in demand is expected only by the second half of FY21.” 

Analysts at JP Morgan, in a November 22 report, noted, “The cement sector is likely to see slow volume growth after two years of strong demand.” The analysts added, “Hopes of a second half (for FY20) recovery have been pushed out, given the muted award activity for roads/government programmes and persistent weakness in urban real estate construction activity.” 
Some like UltraTech are hopeful of an earlier recovery. Analysts with Motilal Oswal in a December 26 note said, “Demand has picked up recently and improved the visibility of growth in the March 2020 quarter. Overall demand in the country should be better in FY21 at 6 per cent year-on-year (YoY) and the East should see stronger growth at 10 per cent YoY.” 

The report was based on takeaways from a meeting with the UltraTech management. 

All India cement prices have also moved in tandem with the tepid demand. Based on data available upto November 2019, sourced from JM Financials research reports, cement prices either declined or remained flat during eight months.

The industry’s capacity utilisation also took a hit in the April-June 2019 period. Utilisation in the June quarter was at 67 per cent as volume growth declined 3-4 per cent after a seven-quarter growth rally.

The sector has been facing lower capacity utilisation for most part of the last decade. A YES Securities Research note said supply overhang for the sector rose to 156 million tonne per annum (MTPA) in FY19 against 38 MTPA in FY09. Capacity utilisation in the same period fell to 70 per cent from 80 per cent in FY09.

“We expect capacity utilisation of the industry to gradually improve from the current 67 per cent-68 per cent to about 80 per cent-82 per cent in the course of three to four years,” Chouksey added.

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