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Outlook 2018 Cement industry

Geared up to take on challenges

The Indian cement industry, which is the second largest producer of cement globally, has added 110 million tonnes by way of capacity in the past five years.

Geared up to take on challenges


Yadupati Singhania

The Indian cement industry, which is the second largest producer of cement globally, has added 110 million tonnes by way of capacity in the past five years. FY 2017-18 was a relatively tough year for the industry, with growth coming in at a muted low single digit. The most obvious cause of this was the slowdown in the housing sector, which consumes about 65 per cent of India’s total cement production. FY 2017-18 was also the year of challenges as the ban on sand mining, and use of pet coke diminished market concentration of industry leaders.

Cost vs demand

The cost of cement is about 10-12 per cent (approx.) of the total construction cost, the cost of steel is about 15-20 per cent (approx.) of the total construction cost, and other materials account for 25-30 per cent of the total construction cost. Thus, increase in the cost of these will have enormous impact on the construction sector.  The recent mining restriction, the doubling of prices, along with further hike in input costs is likely to create pressure on cement consumption.

At present cement is in the highest GST rate slab, and there is no risk of rate hike as well. However, any southward change in GST will lead to a spur in cement demand, and better realisations for the industry. Now cement attracts 28 per cent GST, which means a higher rate of tax leading to increased costs for the infrastructure sector.

Growth trajectory

Growth in the cement sector in FY 2018-19 would most likely be fairly high as compared to the trend of the previous year. This is likely to be driven by the slew of infrastructure projects that have been announced by National Democratic Alliance-led central government. Chief among these are the Bharatmala Project that seeks to develop 84,000 km of roads by 2022, the Smart Cities Project and the Housing for All by 2022.

Challenges

Despite the infrastructure push, the sector will most likely continue to face some severe headwinds, such as higher fuel prices which may cause an uptick in logistics cost with an ultimate impact on margins. 

Capacity utilisation in the cement sector remains on the lower side which may put pressure on the prices. The industry has made huge investments for potential increase in cement demand. If by any chance this uptick in demand was not to materialize, cement makers will experience a glut situation leading to an immediate and sharp fall in prices. 

Perhaps the biggest cause of worry at present is the uncertainty over pet coke imports. Given the demand and supply scenario of domestic pet coke any restriction in import of pet coke would force the industry to resort to coal — a more expensive proposition. In the absence of price elasticity and the inability of the market to absorb higher prices of cement, margins are likely to remain under pressure as well. 

— The writer is CMD, JK Cement

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