Cement demand impacted by cut down in government spending
India’s cement sector has been impacted by poor offtake from the infrastructure sector and a slow pick-up in real estate activity. And these have resulted in companies sitting on idle capacity due to low demand.All-India cement production grew 5.6 per cent in 2014-15 against three per cent in 2013-14, according to rating agency ICRA. “Cement demand was also impacted by cut down in government spending in the first quarter of 2014-15, muted demand from real estate and construction projects and slow recovery in infrastructure spending,” Sabyasachi Majumdar, Senior VP, ICRA, said in a report.There is an increase in merger and acquisition (M&A) activity in the last few years with multinational players getting more active in the Indian sector. “Clearly, multinational players are increasingly looking to enter India,” Shrenik Gujarathi, Senior Analyst, Angel Broking told this correspondent. “What is of interest to the multinational players is the expected rise in cement demand and lagging supply.”
Last week, LafargeHolcim sold two units to Birla Corporation for Rs.5,000 crore but that was in accordance with the Competition Commission of India requirement for their merger in India. The combine is the single largest player in the country with 68 million tonnes capacity.Besides, capacity utilisation levels in the industry are currently at around 71 per cent and will also gather steam. “Increasingly, setting up new plants will prove challenging due to issues such as land acquisition and access to limestone reserves,” Mr. Gujarathi said. This makes acquisitions a more attractive option that setting up greenfield projects.
H.M. Bangur, MD, Shree Cement & former president, Cement Manufacturers’ Association (CMA) said there was no significant capacity being added in the near future. “New capacity is coming in at a slower rate compared to the prospective improvement in demand. So the industry will go into ‘Auto-correct’ mode.”India’s installed capacity is around 360 million tonnes and capacity addition is expected to dip in the coming year. In 2015-16, Mr. Gujarathi said it could be around 15 million tonnes and around 11 million tonnes in 2016-17.
ICRA expects demand to grow at 6.8-7 per cent in 2015-16 with a pick-up in the overall economy. “Given the capacity overhang, the capacity utilisation is likely to remain moderate at 72 per cent in 2015-16; but it is expected to improve to 77 per cent in 2016-17, driven by both pick-up in demand as well as slowdown in new capacity addition,” ICRA said.
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