Production capacity growth slows down and demand grows
India's cement production grew by 5.6% year-on-year in FY2015 and 3% in FY2014. Indian rating agency ICRA said that the recovery of infrastructure development, as well as the improvement of investment cycle and the overall economy, will lead to a 6.5% -7% increase in cement demand in fiscal year 2016.
ICRA believes that with the recovery of infrastructure, investment and the overall economy, cement demand will gradually improve in the middle of the year. They believe that the recovery of cement demand can reflect the recovery trend of the economy. Industry reports show that 25 million tons of new cement production capacity will be added in fiscal year 2014, and the new production capacity will be reduced to 22 million tons, 19 million tons and 14 million tons in fiscal years 2015, 2016 and 2017, respectively.
Demand for cement will grow over the next three years as the new government prioritizes housing and infrastructure. If the government maintains its commitment to revitalize the capital expenditure cycle and intensifies its efforts in infrastructure construction and satellite town construction, the average annual growth rate of cement demand may reach 7-9%, but this still can not make full use of production capacity, but the utilization rate of production capacity is expected to rise from 73% in fiscal year 2017. This will contribute to the price increase.
Regarding future demand growth, Sabyasachi Majumdar, senior vice president of ICRA, said: Although the government has made clear the idea of steady growth, the policies adopted by the new government still need time to implement.
Madhusudan Shah, chairman of the Mumbai Cement Chamber of Commerce, said a substantial increase in cement demand may take more time.
In the second and third quarters of 2014, cement demand showed a certain growth due to the impact of pre-election investment and monsoon delay, but the growth rate of cement demand slowed down after the election cycle. In the first quarter of 2015, cement demand was affected by government spending cuts, and the slow recovery of real estate and construction projects and infrastructure construction projects led to a slowdown in cement demand.
In addition, the decline in crop yields due to the severe monsoon has affected agricultural incomes, resulting in a reduction in the amount of cement needed for housing construction and other uses in rural areas after the monsoon. At the same time, regional climate factors such as monsoon in the south, extremely low temperature in the north in the first quarter of 2015 and non-seasonal rainfall have affected construction activities in some areas, and cement demand has been affected accordingly.
Price movements
Over the past few years, India's cement market has been dragged down by overcapacity and slowing demand, with cement prices rising far below the inflation rate of costs. In 2011-12, the average annual growth rate of cement prices in northern India was 3.5%, the average annual growth rate of cement prices in western India was 5-7%, and the average annual growth rate of cement prices in eastern India was 6.5%.
Between 2005 and 2008, increased government spending on rural housing, infrastructure such as roads and railways, increased private capital expenditure, and increased disposable personal income led to an average annual growth rate of 10% in cement demand. Cement prices have increased by 10-12% annually, and the profit margins of cement manufacturers have expanded. They used surplus capital to build new production capacity, and the national cement production capacity increased rapidly from 100 million tons to 290 million tons in just three years from 2008 to 2011. However, with the unexpectedly sharp slowdown in the economy, cement demand began to fall in 2011, and cement producers quickly lost their pricing power.
Cement companies' operating margins fell 1.3 percentage points quarter-on-quarter to 14.1% in the fourth quarter, according to ICRA estimates.
In the past few months, there has been a seasonal rebound in cement prices across the region. For example, the retail cement price in Delhi rose from 268 rupees/bag in September last year to 288 rupees/bag in October. After a period of stabilization, it fell back to 285 rupees/bag in January 2015. Prices rebounded in most regions in January, ranging from 4 to 14%, with the lowest increase in Kolkata and the highest in Mumbai. The overall selling price of cement in Mumbai rose from 320 rubles per bag in December to 364 rubles per bag in January.
The price of cement in Hyderabad in the southern region has risen from 321 rubles per bag to 350 rubles per bag, and this year it has risen from 375-380 rubles per bag to 390 rubles per bag. Logistics bottlenecks are also a reason for the rise in cement prices in the first quarter of 2015.
Noopur Jain, assistant vice president of ICRA, said that the pricing power of cement enterprises will certainly be improved. "With the gradual improvement of the imbalance between supply and demand, cement enterprises will raise the price of cement.". Although it may not be as strong as the pricing power of enterprises in 2007 or 2008, prices will certainly improve in the next six months to a year.
In this case, the only factor that can keep prices rising is capacity consolidation. JP Association has sold some of its northern capacity to UltraTech over the past two years. In 2012, Dalmia Cement acquired stakes in two cement companies, Calcom and Adhunik Cement, located in the east.
"The profitability and debt protection indicators of cement companies will improve in the 2015-2016 fiscal year, but will remain weak," Majumdar said. The growth of infrastructure construction projects and the overall investment cycle are still the main driving forces for the recent price rise.
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