Cement makers likely to slash capacity by 8% this year

Step will help ensure a balance between demand and supply

ACC, UltraTech Cement and other Indian cement makers may cut capacity utilisation by as much as 8 per cent in the financial year ending March 2008 as demand slows and new capacities are added, industry experts and analysts said.

"Demand growth will not be as much as it was earlier as core sectors are registering a slowdown. In FY09, the average capacity utilisation of the domestic cement industry will slip to 87 per cent from 95 per cent during the last year," H M Bangur, president of the Cement Manufacturers' Association (CMA) and managing director of Shree Cement, said. "Industry's capacity is enough now.'' 
 

LOOSE MIX Low growth demand scenario projected by working group on cement industry
Year	Domestic demand	Production required	Capacity needed**
2007-08	166.60 (168.79)	176.60 (178.79)	196.22 (198.66)
2008-09	182.66 (187.51)	192.66 (197.51)	214.07 (219.46)
2009-10	200.33 (208.38)	210.33 (218.38)	233.70 (242.65)
2010-11	219.76 (231.66)	230.26 (242.16)	255.84 (269.07)
2011-12	241.13 (257.61)	252.13 (268.61)	280.15 (298.46)
Figures in million tonnes                                               ** Capacity utilisation at 90% Figures in brackets are of high growth demand scenario

CMA in its latest report has said that the industry added 30.34 million tonnes of additional capacities during the last financial year instead of 22.24 million tonnes as estimated earlier. This made the industry meet the target set by the report of the working group on cement industry for the eleventh five year plan (2007-12) from the Ministry of Commerce and Industry.

However, in a changing economic scenario with GDP growth rate being seen at 7.5 or below, industry experts said that cement firms will be in trouble with excess of capacities and relatively lesser demand.

A city-based analyst, who did not wish to be named, said that in the following year (FY10) the capacity utilisation may further dip to 78 per cent. "No company will produce cement only to dump it in a less demanding market. Out of the announced capacities in the next two years, we expect around 55-60 million tonnes to come on stream," he added.

Moreover, on the exports front too, West Asia "" the prime export market for the domestic cement industry "" will turn into a surplus region by FY10.

This will further reduce scope for cement export and firms will have to divert the export material to the domestic market.

Since, cement industry's growth rate is more or less linked with GDP of the country, cement companies and industry analysts said that growth rate of the industry will be below 10 per cent. This will put the estimates of the working group at stake as it gave priority to the high growth demand scenario of 11.5 per cent for the cement industry assuming GDP at 9 per cent.

"The June quarter this year saw demand growth of less than 6 per cent, however, in the long-term perspective we see an average growth of 8-9 per cent," added Bangur. This suggests that the industry's growth will now be in line with the low growth demand scenario where the report of the working group puts GDP at 8 per cent and subsequently the cement demand at 10 per cent.

However, industry experts said that scenario could be worse than this as they expect a lower GDP growth. They ruled out the possibility of industry coming back on track even till 2010-2011.

"With real estate sector getting slowing down and housing loans becoming costlier, cement sector will not remain insulated with such factors. I expect the industry will grow at a rate less than 10 per cent," said Pawan Burde, senior research analyst, Angel Broking.

The report of the working group on cement industry (which has three demand scenarios "" low, average and high), had stated, "In view of the government's latest reviewed pragmatic approach giving thrust and focus in sustaining 9 per cent GDP growth during the eleventh five year plan, the high growth scenario may be adopted for 2007-12 where the growth of cement sector would be 11.5 per cent."