Cement demand hit by construction slowdown, higher input costs
Chandrakant / 20 Dec 2011
The cement demand was expected to see a pickup after the monsoon. However, the actual situation was against these expectations, and remained subdued in the last 2 months.
As per the numbers released by the Cement Manufacturers' Association for Oct 2011, the dispatches have declined by 2% on a YoY basis. For Nov 2011, the demand increased by 19% on a YoY basis, which was largely due to the low base effect in the same period last year. If we remove the base effect and compare the demand on a MoM basis, we see that the growth actually slowed down in Nov 2011, declining by -2.1 on a QoQ basis.
The primary reasons for the subdued demand in the last few months following the monsoon are as follows:
- The major part of the cement demand comes from the housing and infra sector, which constitutes 68% of the total consumption. Road construction constitutes only 5% of the total consumption, while the rest of the demand comes from the defence and irrigation sectors.
- Cement demand between April-Sep 2011 remained muted, growing by 1.8% on a YoY basis. This was due to the slowdown in housing and construction activity, as well as other issues such as a heavier monsoon and the increase in the cost of borrowing, which affected the volume offtake.
- However volume offtake continued to remain subdued in Oct 2011 as well. This was due to slow pick up in housing and infra activities, which have not yet resumed construction fully after the monsoons. The major reason for the slow pickup in demand is the higher interest rates, which have forced developers to delay some of their projects. High interest rates and inflation has made the projects un-viable. Also, due to the high default risk associated with rising interest rates, banks have become more stringent in approving loans for the developers. This has also led to a paucity of funds for developers, causing them to delay their new projects and to go slow on the ongoing construction projects as well.
- The cement companies also increased cement prices in Oct and Nov 2011 despite the demand slowdown, in order to offset the high input costs. Increased cement prices have led to construction costs shooting up, making it tougher for developers to maintain their margins.
We, at DSIJ, believe that the cement demand will continue to remain subdued in the coming months. However, this has not prevented the cement companies from increasing the cement prices, which was largely done to offset the increased input cost of coal and freight charges. Further, to maintain the cement prices in a weak demand scenario, the companies have opted to run at lower capacity utilisation.
In the current quarter, the cement companies are likely to witness decent growth in their revenues mostly because of 2 reasons. First, higher cement prices will help them with better realisations. Secondly, they will be benefited by the low base effect due to the dismal performance and some production cuts last year. However, higher input cost will continue to keep the margins under pressure for these companies in the Dec 2011 quarter.
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