Swiss firm Holcim-controlled cement makers ACC and Ambuja Cements believe margins will be under pressure as cement price may remain stable in the short-term owing to oversupply in market.
However, the margin pressure is not dettering the two from expanding capacity by five million tonnes per annum (mtpa) to 57 mtpa this year. The cement industry, as a whole, utilised 80% of the 260 mtpa capacity last year.
While announcing their annual results last week, ACC had anticipated the pressure on selling price of cement would be "maintained" in the near-term. Ambuja Cements said: "In the short-term, margins may remain under pressure".
The demand-supply imbalance is not an upstart phenomenon for India's cement industry as the trend is being witnessed since the past two years at least.
As per a recent report prepared by rating agency Fitch, India's cement production capacity was 201.3 mtpa in FY08 vis-a-vis 167.7 mtpa demand. Capacity went up to 236.9 mtpa compared to total demand of 181 mtpa in FY09.
The agency further said that the demand-supply imbalance would reach to its highest level in FY13 to 125.8 mtpa with capacity going up to 392.8 mtpa.
Fitch had said that the continued overcapacity in cement sector would exert further pricing pressure on the commodity in 2011, leading to squeezed margin for the manufacturers.
"We forecast around 10% demand growth and over 12% capacity addition in 2011. The overcapacity is likely to result in pricing and consequently margin pressures for most cement companies," it had said.
ACC and Ambuja Cements have exactly 20% of India's total cement installed capacity with big brother ACC contributing 27 mtpa and Ambuja Cements 25 mtpa in 2010.
Work is on at ACC to increase the capacity to 30 mtpa by the middle of the current year and at Ambuja Cements to 27 mtpa within 2011. Industry, as a whole, would be adding 30 mtpa capacity in the current year as well, ACC said.
Reinforcing their faith on India's "robust" growth story, ACC and Ambuja Cements expect that cement demand in the country is likely to grow by 9-10% in 2011 riding on the steady growth of the country's economy and buoyed by increased appetite from infrastructure, construction and housings sectors.
