Don’t miss the latest developments in business and finance.

Cement demand growth may nearly halve to 7% in FY20 on weak Q1 offtake

The bright side is that manufacturers could also benefit as average prices in FY20 are likely to be better than FY19, while costs are likely to be lower

Cement demand growth may nearly halve to 7% in FY20 on weak Q1 offtake
BS Reporter Bhubaneswar
4 min read Last Updated : Sep 02 2019 | 6:55 PM IST
Growth in domestic cement demand is expected to slow down to about seven per cent in FY20, as is also reflected in the relatively weak offtake seen in Q1 of this fiscal.

The growth projection is tepid compared to 13 per cent growth in cement demand in FY2019.

"Although this (slowdown) is likely to affect cement manufacturers, they are likely to benefit from the fact that average prices in FY20 are likely to be better than FY19 while costs are likely to be lower. This is likely to support near term profitability for cement mills", rating agency Icra said.

The cement demand has been weak in Q1 of FY20 on account of slowdown in execution of projects. In April 2019, cement production at 29.2 million tonnes was lower by 12 per cent on a month-on-month basis. Also, in May and June this year, it declined by 2.1 per cent to 28.6 million tonnes and by 0.6 per cent to 28.4 million tonnes (mt), respectively. The demand was impacted owing to the slowdown in the government projects, ahead of the elections and shortage of labour. The offtake is expected to pick up from Q3 FY20, post the monsoon season, and growth of seven per cent is expected during the current financial year. Coming to profitability, in Q1 FY2020, the higher cement prices and lower costs – power and fuel and freight expenses – are likely to result in margin recovery.

“We expect cement demand growth to taper off in FY20 after a strong double-digit growth in the previous year. The is already being reflected in tepid growth in Q1 FY20, on the back of slowing of the project execution on account of general elections (usually resulting in labour unavailability). In Q2 FY20, the consumption is expected to be on lower side owing to the monsoon season. However, Icra expects the demand to pick up in Q3 FY20, with growth likely to be driven by housing, primarily rural housing and affordable housing, and improved focus on infrastructure segments, mainly road, railway and irrigation projects”, Sabyasachi Majumdar, senior vice president and group head (Corporate Ratings), Icra said.

On the capacity side, Icra expects 18-20 million tonne per annum (mtpa) to get added in FY20. Most of these new supplies are not fully integrated and are largely backed by old limestone mining leases. Also, the grinding capacity addition is higher in relation to the clinker capacity, thus, the actual production from new capacities is likely to be lower.

While the incremental demand of around 24 mt is greater than the incremental supply, the capacity overhang is likely to keep the utilisation at moderate levels at 71per cent in FY2020, despite some increase from 69 per cent in FY2019.

At the pan-India level, prices in most markets are higher in July 2019 as compared to the corresponding period previous year. In Delhi and Hyderabad markets, the prices are higher by 16-20 per cent and in Mumbai, it was around 10 per cent during this period.

The cement companies increased the prices in March 2019 in most markets on a month on month basis. While the price increase sustained in April-May 2019, the prices declined in June 2019 in the southern markets owing to demand slowdown along with supply pressures. In July 2019, the prices also declined month-on-month in the eastern and western markets.

“The easing of the cost side pressures owing to decline in the input costs such as coal and pet coke prices by 13.5 per cent YoY (year-on-year) and by 11 per cent y-o-y respectively in April-July 2019 would result in lower power and fuel expenses during Q2 FY20. The cement companies’ profitability is likely to increase in Q2 FY2020 on the back of higher prices and lower input costs,” Majumdar added.

Topics :cement industryCementIndia CementsCement stocksCement pricescement firmsCement production