This article is an abridged version of the full article, which appeared in the October 2012 issue of World Cement. Subscribers can view the full article by logging in.
The monsoon effect
Poor monsoon rains this year have hit Indian farmers badly but have helped boost demand for cement during what is usually the low season for the cement industry. The lack of rain has allowed construction companies to continue working as usual and pushed up demand for cement by more than 10% all over India in June and July, according to property developers, with the price of cement also edging up as a result.
During a normal monsoon season, cement demand decreases by mid-June and remains depressed for another three months as heavy rain falls all over India causing construction work to slow down. For example, cement demand growth was just 1.6% in June 2011, while double digit growth is expected when accurate cement demand data becomes available for June of this year.
Observers believe the recent rise in cement prices may not be solely due to unexpected increased demand from the construction industry. Many cement manufacturers close some of their plants during the monsoon season for annual maintenance owing to the normal decrease in cement demand, which results in lower production capacity availability during the annual rains.
Increased monsoon season demand is lifting cement production in various parts of the country. However, this is not expected to reverse the overall trend that India’s cement industry has faced during the past two years of subdued demand growth and declining plant operating rates caused by the large increase in cement capacity that has recently come on stream.
Almost 63 million t of new high quality cement production capacity has been commissioned during the past two years according to the Cement Manufacturers Association of India (CMA). The impact of the new capacity additions and weaker cement demand has been to push down capacity utilisation rates across the country from 85% in FY09/10 to 75% in FY11/12, CMA figures show. Housing construction and government infrastructure investment helped boost demand across most of India in FY11/12. Cement consumption grew by 13.8% in the western region followed by 11% in the north, 9.3% in central India and 2.9% in the eastern region.
The situation is different in the south, however, where some 23 million t, almost one third of India’s new cement manufacturing capacity, has been installed during the past two years. Local political issues, particularly in Andhra Pradesh state, which is an important cement market, caused cement demand for infrastructure projects and housing construction in the south to fall to 3% below the previous year’s level for the first three quarters of FY11/12, with southern demand only showing growth in the final quarter of the year. As a result, utilisation rates in the southern region are the lowest in India, with the overall rate falling to 63% in FY11/12.
Apart from lower construction activity last year, another reason for the low plant capacity utilisation in the south has been a shortage of rail freight cement wagons, preventing southern cement producers from supplying cement markets in eastern and northern India that are located too far away to be supplied by road transport.
The outlook this year is brighter. Cement demand picked up in the first quarter of 2012 across India, raising hopes for sustained growth during the rest of the year.
According to the CMA, cement demand rose 10% countrywide in January – March 2012, compared with 5.6% during the preceding nine months. Growth in demand was largest in southern India, reaching 9.6% in contrast to a 3% y/y fall during the previous nine months. It is expected that demand in the south will catch up with cement supply by FY14/15.
Although cement demand is picking up, capacity utilisation is expected to fall even further this year as more cement plants come onstream. According to The Hindu newspaper, cement demand is likely to rise by 8% in FY12/13, lifted by rising demand from infrastructure construction and housing development projects in western and eastern India.
A forecasted 7.5% increase in GDP will help lift cement demand this year as the economy picks up again.
India’s GDP growth in FY11/12 is estimated at 6.9%, a sharp fall from 8.4% the previous year due to the impact of the Eurozone crisis, high domestic inflation and weak industrial growth.
A further 25 million t of production capacity is due to be commissioned this year. Cement plants totalling around 9 million t are due to start up in the south, while about 7 million t of new capacity is set to be commissioned in eastern India.
The impact is likely to depress the cement industry’s all-India operating ratio to about 72% this year, with the operating ratio in the south likely to be in the low 60 percentile range and eastern India in the mid to upper 60s.
Cement prices are expected to rise in northern India, which geographically is too far from southern and eastern India to be supplied from those regions where surplus cement production capacity is available. Meanwhile, cement prices and supplies have recently made headline news in the country as a result of the Competitive Commission of India (CCI) imposing a collective fine totalling Rs.60 billion (US$1.1 billion) in June for price fixing. Announcing the fine, CCI accused the companies of “limiting” cement supplies and controlling prices through an “anti-competitive agreement”. CCI’s action follows a formal complaint from the Builders’ Association of India that the 11 cement companies had formed a price cartel. The CMA has also been implicated in the price fixing issue. It has been asked to disengage and disassociate itself from collecting whole and retail cement prices from member cement companies and for circulating details on production and dispatches of cement companies to CMA members. The penalty is bigger than expected and the accused cement manufacturers are preparing to enter the appeals process. India’s three largest cement manufacturers, UltraTech, ACC and Ambuja Cements, have said they will appeal the ruling at the country’s Competition Appelate Tribunal.
India’s cement production capacity is currently estimated at about 320 million t, with 148 large and 365 mini cement plants, including public sector facilities. The CMA’s long-term target calls for India’s cement industry to reach a capacity of 550 million tpa by 2020, which will involve adding a further 230 million tpa. With the cement industry due to install around 25 million t in new cement production capacity this year, India’s total cement production capacity will reach approximately 345 million t by the end of FY12/13.
Competition Commission of India
Indian Cements Ltd’s 2012 Annual Report.
Indian Cement Manufacturers Association
The Economic Times
The Hindu Newspaper