Cement demand growth slows but mills to stay profitable: ICRA
Relative weakness in cement offtake in Q1FY20 is indicative of the slowdown. Average prices for FY20 are, however, likely to be better than FY19.Updated: Sep 03, 2019 10:08 IST
Growth in domestic cement demand is expected to decline to around 7% in FY20, according to credit ratings agency ICRA. This compares to a 13% demand growth in FY19.
Relative weakness in cement offtake in Q1FY20 is indicative of the slowdown.
Average prices for FY20 are, however, likely to be better than FY19, while costs will be lower, supporting near-term profitability for cement companies.
In the note, Sabyasachi Majumdar, Senior Vice President & Group Head – Corporate Ratings, ICRA, said “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 labour unavailability). In Q2 FY2020, consumption is expected to be on lower side owing to the monsoon season.”
ICRA expects demand to pick up in Q3 FY20, likely to be driven by housing, primarily rural housing and affordable housing, and improved focus on infrastructure segments, mainly road, railway and irrigation projects.
In April 2019, cement production at 29.2 million tonnes (mt) was 12.0% lower on a month-on-month basis. Further, in May 2019 and June 2019, output declined 2.1% to 28.6 mt and by 0.6% to 28.4 mt, respectively.
Demand was hit due to a slowdown in government projects, ahead of 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. In Q1 FY2020, higher cement prices and lower costs – power and fuel and freight expenses – are likely to result in margin recovery,” the note added.
On the capacity side, ICRA expects 18-20 million tonnes per annum to get added in FY20. 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 mt is greater than the incremental supply, the capacity overhang is likely to keep the utilisation at moderate levels – 71% in FY20– despite some increase from 69% in FY 2019, the note said.