Cement production volume in 2016-17 is likely to see a year-on-year (y-o-y) decline for the first time in 15 years as demonetisation hit demand, analysts said.
India’s cement industry is estimated to have a capacity of about 420 million tonnes (mt). Production grows 5-6% a year, and caters to the infrastructure and commercial sectors. It survived the demonetisation shock quicker than expected, with the southern markets affected the least, Mint reported on February 7.
According to HDFC Securities Ltd, production volume in January fell about 13% y-o-y, the first such decline since January 2001.
The sector will likely see a decline in volume this fiscal year, which was last seen in fiscal 2001, HDFC Securities analysts Ankur Kulshrestha and Sarfaraz Singh wrote in a March 2 report.
“Our channel checks across the country show cement demand, though still weak, is recovering from the effect of this move. Though states undergoing political processes (Uttar Pradesh and Punjab) are an exception to this recovery as of now, there is a possibility demand may pick up once the government formation is complete,” Kulshrestha and Singh wrote.
It is highly likely this fiscal may end with a marginal y-o-y decline for the cement sector, CLSA said in a March 1 note to clients. “Cement production (as per Index of Industrial Production) declined 13.3% y-o-y in Jan 17 which was the sharpest decline in several months,” it said. “For 2016-17, there is a strong chance industry volumes would be down slightly, a first in over 15 years.”
After the government withdrew high-value currency notes, cement production growth slowed to 0.5% in November (demonetisation was announced on November 8) and fell 9% in December—taking production growth for the first nine months of fiscal 2017 to a mere 2.6%, according to Ambit Capital.
“Despite cement demand in 2016-17 being the weakest in 10 years, average prices have increased 5% as they are more of a function of supply moderation and pricing discipline than demand growth,” Ambit Capital analysts Nitin Bhasin and Parita Ashar wrote in a February 27 report.
Last year, cement makers benefitted from low fuel and commodity costs. However, prices of coal and petcoke have risen sharply in the past six months, leading to higher fuel costs. “Though the prices have recovered from the demonetisation lows, they have still not touched the October 2016 levels,” the HDFC Securities report said.
HM Bangur, MD, Shree Cement Ltd, declined to comment. A spokesperson for ACC Ltd also declined to comment.
Ambuja Cements Ltd and JK Lakshmi Cement Ltd did not respond to an email query sent on Friday.
(Published in arrangement with Livemint.com)