Fitch: outlook for Indian cement industry

Fitch: outlook for Indian cement industry
Published: 22 January 2010

Fitch Ratings has today said, in a just published Special Report, that it expects the 2010 outlook for the Indian cement sector to be Stable to Negative as overcapacity risks loom large in the wake of record high capacity additions (especially in south and north India) and given the significant decline in prices in H209.

However, the agency expects strong demand growth of between 10%-11% in 2010, with signs of recovery already having emerged from November 2009; however a slower-than-expected recovery in real estate, together with a withdrawal of the fiscal stimulus, could potentially hold back growth.

Fitch expects about 50Mt of capacity additions in 2010, taking total capacity close to 300mt. This expansion, if commissioned in time, would reduce capacity utilisation rates to about 75%, thereby capping any significant upside in prices.

Fitch expects pricing pressures to continue, with increased pressure on utilisation rates and greater fragmentation of production, since many small players are increasing capacity to become mid-sized players, thereby intensifying competition and reducing supplier discipline.

The regional variations in prices should continue, with the south being the most vulnerable (with the highest planned capacity additions), and the north and west being relatively resilient.

The profitability of most producers should weaken further in 2010, from highs seen in mid-2009, as coal and freight costs have risen and as prices are expected to stabilise at much lower levels. Fitch, however, notes that strong demand growth and a delay in commissioning new capacity may cushion, to an extent, the impact on profitability.

The agency expects large producers with strong balance sheets and improved cost structures should be able to present a stable credit profile in 2010, and be better equipped to withstand an industry slowdown versus their peers with higher cost structures.