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?
With the lockdown in place for close to 40 days, the demand offtake effectively ceased during that period. With the lockdown extension, the demand sharply corrected in Q1 FY2021 with discontinuation of construction activities during April followed by reinstatement with restrictions during May and only gradual improvement thereafter. Beyond the immediate near term, impact could be there on offtake due to domestic demand compression arising out of loss of income of prospective consumers.
With the lockdown continuing for most of April 2020, the production significantly declined by 86% YoY and 84% MoM to a meagre 4 million MT. With some relaxation in the lockdown rules by the Government, the pent-up demand following complete supply stoppage and the trigger to complete pending works before the onset of the monsoons has supported some demand revival in May-June 2020. The production recovered to 22.2 million MT in May 2020 and to 26.3 million MT in June 2020. While the production improved by 17.4% MoM, it has still been lower by 6.8% on a YoY basis. In Q1 FY2021, production has been lower by 38.3% on a YoY basis. Further, the localised lockdowns, the onset of the monsoons, the labour availability issues and the funding constraints by the state governments are likely to impact the cement demand in Q2 FY2021. Hence, the demand is likely to recover in H2 FY2021 post monsoons. ICRA expects the cement demand to decline by 22%-25% in FY2021.
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?
Despite significant decline in demand, the favorable input costs, majorly the lower power and fuel costs supported the profitability of the cement companies in Q1 FY2021. The lower power costs was on account of lower imported coal prices by 22% YoY and petcoke prices by 19% YoY in Q1 FY2021.
On the pricing front, while cement companies increased prices in April – May 2020 across regions, there was pressure on the realisations towards June-end and in July 2020 in some markets. While the prices in the North and West were marginally higher by 3% and 1% respectively, that in the South were significantly higher by 12% in Q1 FY2021 on YoY basis.