ICRA: Cement Demand To Cool Down In FY2020, After Strong FY2019 Showing
Domestic cement growth is expected to slow down to around 7% in FY2020, as is also reflected in the relatively weak offtake seen in Q1 FY2020. This is compared to 13% growth in cement demand in FY2019. As per ICRA note, although this is likely to affect cement manufacturers, they are likely to benefit from the fact that average prices for FY2020 are likely to be better than FY2019 while costs are likely to be lower. This is likely to support near term profitability for cement mills.
Mr Sabyasachi Majumdar, Senior Vice President & Group Head – Corporate Ratings, ICRA adds: “We expect cement demand growth to taper off in FY2020 after a strong double-digit growth in the previous year. The is already being reflected in tepid growth in Q1 FY2020, on the back of slowing of the project execution on account of general elections (usually resulting in labor unavailability). In Q2 FY2020, the consumption is expected to be on lower side owing to the monsoon season. However, ICRA expects the demand to pick up in Q3 FY2020 with the 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.”
As per ICRA, the cement demand has been weak in Q1 FY2020 on account of slowdown in execution of projects. In April 2019, cement production at 29.2 million MT was lower by 12.0% on an M-o-M basis. Further, in May 2019 and June 2019, it declined by 2.1% to 28.6 million MT and by 0.6% to 28.4 million MT respectively. The demand was impacted owing to the slowdown in the Government projects, ahead of the elections and shortage of labour. The same is expected to pick up from Q3 FY2020, post the monsoon season, and growth of 7% 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.
On the capacity side, ICRA expects around 18-20 MTPA to get added in FY2020. 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 million MT is greater than the incremental supply, the capacity overhang is likely to keep the utilisation at moderate levels – 71% in FY2020, despite some increase from 69% in FY2019.
At the pan-India level, the 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% and in Mumbai, around 10% during this period. The cement companies increased the prices in March 2019 in most markets on an M-o-M 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 declined in the eastern and western markets on an MoM basis. Mr Majumdar adds, “The easing of the cost side pressures owing to decline in the input costs such as coal and pet coke prices by 13.5% Y-o-Y and by 11% Y-o-Y respectively in April-July 2019 would result in lower power and fuel expenses during Q2 FY2020. The cement companies’ profitability is likely to increase in Q2 FY2020 on the back of higher prices and lower input costs”.