The cement industry seems to have come a full circle as the year draws to a close. Starting on a bullish note with prices touching historic high amid buoyant demand, cement industry slipped on to a sticky wicket as the realty sector was rattled by the unprecedented financial crunch. Caught between the government intention to tame the raging inflation and skyrocketing input costs in May, the industry was given an ultimatum to hold prices.
The Finance Minister, warned cement companies to reduce price voluntarily, if they (cement manufacturers) do not voluntarily cut prices, Govt prepared to take administrative measures. These are all the threats faced by industry in the year 2008.
To increase supply in the domestic markets, exports were banned though the country shipped less than three per cent of the total production of about 200 million tonnes. On the other hand, duty-free imports were allowed. Prices of coal, one of the major inputs for the cement industry, hit new high on supply constraints and good demand in the first half of 2008. It touched a high of $240 a tonne when the crude oil was hovering $140 a barrel. Companies responded positively to the government directive to maintain retail cement prices.
But now the scenario has been totally changed, now the cycle turned to worst because of slow down in real estate, infrastructure due to global meltdown and liquidity crisis. Citing poor demand across the country on account of the economic slowdown, several states like HP and Punjab both these States are showing negative demand of about 8% as compared to last year. The demand slowdown has resulted in increase of clinker stocks which resulted in shutdown of manufacturing operations for balancing the clinker stocks.
Most of the cement companies were operating well below their production capacity to tide over the demand slowdown, but were still building up inventories. Capacity utilisation of the industry dropped to a low 82 per cent in the first half of the financial year 2009, against 93 per cent in the same period last year. Though drop in capacity utilisation was partially attributed to the new capacity added, cement companies, off the record, agreed that most of their plants were running well below the optimal level. The industry was expected to add 35 million tonnes (mt) of capacity in FY09 and another 35 mt of fresh capacity in FY10, against incremental demand growth of 10-12 mt, assuming an annualised demand growth of 5-6 per cent. At this rate, the industry may be saddled with 40 mt of surplus capacity by the end of FY11 and capacity utilisation is estimated to fall to about 78 per cent from 98 per cent in FY08. The cement industry has managed to add only 8.16 million tonnes, taking the total capacity to 206.46 million tonnes till November against 198.30 mt capacity recorded in FY'08.
All these resulted in poor demand and price cuts. To boost the industry Govt cut the excise duty, reduced the fuel prices, removed the export ban and also reduced the interest rates to boost real estate. All these measures failed to boost the industry, we except further price cuts to come because of excess supply and companies going face sever pressure on profitability.
Created by Basanth Patil. N.P. (BOR Team)
Mumbai
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