Greenfield capacity may fall short of projection, India

Greenfield capacity may fall short of projection, India
Published: 21 June 2007

Greenfield capacity creation in cement is facing delays, according to a report from the Economic Times of India, with land acquisition and civil construction delays the major hurdles.

Even though 85-90Mt new capacity has been announced, only 50-55Mt has been ordered to plant and equipment manufacturers. Industrial construction companies are facing capacity constraints, leading to delays in commissioning.

Currently, about 90Mt new capacity has been announced by large and small cement manufacturers. Current demand-supply estimate factors in the possibility of 80Mt of these capacities coming in by fiscal year 2010, leading to temporary oversupply in second half of FY09. However, channel checks with cement plant equipment manufacturers suggest that actual capacity creation may fall short of announced capacity, said UBS Securities.

Only about 50Mt has been ordered to equipment suppliers-opening up the possibility of delays in commissioning of several new capacities, and hence raising the possibility of lengthening of the upturn phase of the current cement cycle.

Besides, there are indications from manufacturers that there could be significant delays in the civil construction phase. Order books of companies which carry out industrial construction on a large scale — L&T, Simplex and Gannon-Dunkerly — are full.

According to Enam Financial, new greenfield capacities are becoming a problem area as they are getting delayed. Greenfield capacities have the highest scale, complexity as well as set up time. Including the land acquisition, it takes around 36 months for a greenfield site to come up.

The northern region seems to be the most vulnerable as greenfield sites are likely to be delayed by six months from original schedule. Greenfield accounts for one-third of incremental all India capacities. Brownfield expansions are on schedule, there is a rush to create supply as the industry’s profit is at a historical high.

Cement stocks have corrected by 20% from their peak despite rising profits, following the government intervention in prices and huge additional supply fears, it says. According to UBS, average net realisations in April-June quarter were marginally higher than in the January-March quarter, especially in the South, where retail prices increased Rs 5-6 per bag in May.

Even in other regions, even though retail prices remain constant, net realisations would have increased since first week of May (when fixed excise duties above retail price of Rs 190 per bag were replaced by ad valorem duties, hence bringing down excise duties by Rs 3-7 per bag). Only in central and eastern India retail prices seem to have corrected in line with excise duty reduction.