Sunday, April 5, 2009

>Cement Sector (FIRST GLOBAL)


Dwindling demand & surplus capacity amidst current down cycle signal the end of good times…

Decline in realisation of cement companies appears inevitable on account of excess capacity & subdued demand

The Story…..

The profitable cement cycle, which kicked off in FY05 on the back of soaring demand for cement from the private sector and sent the industry’s price realization as well as profitability skyrocketing to new levels, is now coming to an end. The real estate boom and government’s announcements towards infrastructure development had acted as a catalyst and encouraged cement companies to add more capacities, which will now result in surplus capacity in the cement industry amidst slackening demand, as the global economy is passing through a period of turmoil. India’s GDP is on a slippery path, as is evident from the downward revision in its growth rate. The real estate sector, which accounts for around 60% of the demand for cement, appears to have lost steam and is expected to witness worse times ahead. Moreover, over the last one year, the government’s measures aimed at curbing inflation, such as duty free cement imports, banning of cement exports, and a multiple excise duty structure, have also delivered a severe blow to the cement sector.

The woes of the cement sector have not yet come to an end, despite the sharp decline in imported coal prices, the fall in crude oil prices, re-imposition of countervailing duty, a 4% cut in cenvat and a 2% excise duty cut on bulk cement. The depreciation in the Indian Rupee vis-à-vis the US Dollar has partially negated the positive impact of the decline in imported coal prices and the reduction in coal linkages still remains a key concern for cement players. Also, the higher levels of inter regional movement of cement on the back of the expected phenomenal oversupply will partly offset the benefit of lower fuel cost. In order to provide a boost to the demand for cement, Indian cement companies had passed on the benefits of the reduction in excise duty to the consumers after adjusting for the rise of 7-8% in rail freight costs. Going forward, a decline in the realisation of cement companies appears inevitable on account of the surplus cement capacity and subdued demand. So have the Indian cement industry’s good days come to an end? The answer is YES, as the industry, which is struggling with a decline in capacity utilization, is now preparing itself for a challenging 18-24 month period amidst the current down cycle. In this report, we have looked at the demand and supply scenario in the Indian cement sector and how the capacity additions announced by various cement manufacturers will be absorbed.

  • Indian cement industry in FY09E, FY10E & FY11E
  • Where the industry’s capacity utilisation is headed…
  • Our view on cement demand, oversupply, realisation & margins
  • Region specific analysis
  • Analysing the recent newsflow
Ramp up in installed cement capacity
  • Northern Region – Grasim & Jaiprakash show the way
  • Eastern region – Lafarge & Ambuja plan significant expansion
  • Southern Region – ACC, UltraTech, Zuari cement, Rain Commodity…and many more
  • Western Region – Entry of new player, Murli Agro amidst existing ones, such as Jaiprakash & ACC
  • Central Region - Maximum capacity expansion by Jaiprakash & Prism
  • All India - Big as well as smaller players have huge capacity expansion plans
Factors responsible for subdued growth in cement demand
  • Slackening demand from real estate
  • Exports growth to remain insignificant
  • Downturn in IT sector
  • Slowdown in GDP growth to negatively impact demand
  • Infrastructure activity could take a breather
Current factors determining profitability of cement players...
  • Coal – Imported coal prices decline…but the pain continues
  • Government intervention…more pain & little cheer
  • Competition from imported cement after 26/11?

To see full report: CEMENT SECTOR