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Cement demand is currently being driven by rural India, says Urvisha H Jagasheth, Research Analyst, Industry Research, CARE Ratings

Cement demand is currently being driven by rural India, says Urvisha H Jagasheth, Research Analyst, Industry Research, CARE Ratings

Few months are left for the financial year 2020-21 to end. How will the demand offtake in the remaining months for the cement sector?
During H1-FY21 we observed the demand offtake was particularly tepid in metros/tier 1 cities as the number of cases kept increasing and the virus showed no signs of abating thus affecting construction work and limiting the need for cement. Even with the centre relaxing rules during the subsequent unlocking the economy, the industry has faced challenges with regards to state specific lockdowns. The only silver lining was cement consumption has found its way into the rural and retail markets. Cement demand is currently being driven by rural India due to better labour availability. With reverse migration of workers, there has been an increase in construction of rural infrastructure.
Going forward the cement industry demand is slowly improving from the disruption created from Covid-19 due to pent up demand and improved rural demand. We believe rural demand will be the major driver for cement considering the monsoons have been favourable in most part of the country and the outlook for Kharif crop too looks promising. This could translate in an inflow of cash in the rural economy which could commensurate in infrastructure creation thus augmenting cement demand. With respect to cement demand in Urban India we believe demand will be supported by realtors and institutions resuming work on on-going projects. So overall, demand for cement is slated to pick up for the remaining months of FY21.

What is your assessment for the next financial year 2021-22 for the cement sector?
Production capacity utilisation is slated to increase from the current 40% with recovery in demand which will commensurate in increase in supply. Demand is supposed to recover from the lows which the industry is currently facing. With the possible resumption in institutional infrastructure activities and recovery in government funds there are expectations for the industry to operate at Pre-Covid levels during FY22.   

Major cement manufacturers have reported a decline in net profit compared to the last quarter but not loss. How did the cement manufacturers manage to stay afloat during the lockdown and register profits in Q12020-21?
Major cement manufacturers have adopted various cost rationalisation measures and overhead controls which has resulted in these companies not incurring a loss. Fall in the overall expenditure mainly on account of supply chain management, contract renegotiations, third party spends and fuel efficiency has greatly benefitted the industry.  Based out of the assessment of 36 major cement manufacturers the overall expenditure has fallen sharply by 32.6%. Electricity and fuel cost have declined by about 42.2% due to the sharp drop in crude oil prices and lower pet coke prices. Logistics costs which are the biggest cost for cement industry has also dropped by 35.7% (selling and distribution) on account of lower railway freight given no busy surcharge season and cost of raw materials too has declined by 42.2%. Lower gypsum and fly ash prices have aided in the overall fall in cost of raw materials.

What are the challenges facing the industry?
With the outbreak of the Covid-19 pandemic, the cement industry is facing a myriad of challenges in terms of demand and supply. Firstly the nationwide lockdown had come at the time when construction activities are usually at its peak which has affected the demand for cement in a big way notwithstanding the fact, that demand is also usually affected during the monsoon season. This double whammy has led to a sharp fall in the cumulative supply of cement this year leading a 29.1% fall during April-August 2020-21.  Secondly, cement manufactures are not making any additions to the existing CAPEX in order to conserve their capital/cash flows given the light of the events and the uncertainty. Given the limited demand present there has also been CAPEX deferral announcements as well. Thirdly the pandemic had led to an exodus of reverse migration of labourers which has led to a standstill in operations, disrupting the entire supply chain operations. Certain groups of labourers have been returning but a major part of the labour workforce will only come back after Diwali or when all the agri-work is over.
In terms of offtake, demand for cement from real estate is still muted as the sector is plagued by labour shortages and lack of liquidity. Growth in the housing segment which forms about 68% of cement demand (including low cost housing) is also impacted as commercial & new residential launches will not be able to fully recover during FY21 as realtors will only be focusing on project completing and clearing of existing inventory. Also given how fiscally strained the government finances are at the moment, there have been cuts in spending on infrastructure which has put a halt to new investments towards infrastructure creation thus affecting the demand for cement.

How receptive is the Indian cement sector to Digitization, IoT, Robotic process automation (RPA), Automation, Artificial Intelligence, data analytics? Has the industry benefited by adopting these technologies?
The major players of the Indian cement sector have adapted to Digitization, IoT, Robotic process automation (RPA), Automation, Artificial Intelligence, data analytics to gain a competitive edge.  Core processes such as order to cash, order to dispatch, plan to produce, procure to pay, have been integrated in to have a greater control over the manageability aspect of the entire supply chain and delivery mechanism. Robotics Process Automation (RPA) has been adopted for numerous use cases where manual inputs can be minimized. Streamlining the logistical value chain by enabling the vehicles with GPS, followed by providing of this link to dealers and distributors for live tracking of shipments; introducing single material code and inventorisation of freight were also some of the major reforms which the cement industry is trying to enable with the help of technology.

The real estate builders often complain of cartelisation amongst cement manufacturers. The ultimate sufferers of this cartelisation are home buyers as hike in cement prices are passed on by the builders to home buyers. Your take on this?
The top 20 cement companies account for almost 70% of the total cement production in the country. Large players to an extend do have partial pricing control, but cement in the end is a commodity which does depend on the market forces of demand and supply like, usually, during the summer season prices move up owing to higher construction activity.

Export of cement is negligible compared to production. The capacity utilisation always hovers around 60-70 percent. Why are the manufacturers not keen on export?
Cement is an extremely bulky product and internal logistics too sometimes is an issue for manufactures let alone exporting it overseas. Considering the additional cost which will be associated with exporting the commodity manufacturers are not keen to resort to exports. Cement is also a very dispatchable product closely related to the country’s GDP. The government is rather keen or prioritises to make sure enough supplies are available in the domestic markets. Manufacturers who have plants situated near the coastline and/or ports can probably think about expanding its markets overseas by resorting to exports of surplus production.    

The cement industry depends on government policies and projects to boost revenue. The pandemic has dented the revenue. How can the government step-in and hand-hold the industry in this difficult period?
Before the outbreak of the Covid-19 pandemic in the Indian economy the government was relying on an ‘infrastructure creation’ led economic revival which could have led to an increase in demand for cement. The government can provide a push or stimulate the pace of construction of government infrastructure projects which can help in augmenting the cement demand. Reduction in the rate of GST levied on cement which is currently taxed at the highest bracket of 28% can also help the industry during this difficult period. 

Lastly, where will the maximum demand for the industry come from in the next financial year?
Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward. Demand of the commodity is expected from the government’s focus on infrastructure and housing for all program. Revival in the government infrastructure projects like construction of dedicated freight corridors, ports and other infrastructure projects will also lead to an increase in demand.

 

 




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