It is being anticipated by trade circles that demand for cement in India would grow at a 5-year cumulative annual growth rate of 9.5 per cent, whereas the capacity had increase by 18 per cent in the last 3 years, crossing the rated capacity to reach 28Mta.
Taking into account the planned expansions, the capacity is further expected to increase to 42Mt by FY08. Analysts say that FY07 will prove to be a niggling year for the cement industry. "We believe this slump in performance is due to massive capacity expansion done by cement manufacturers in the country who anticipated abnormal demand growth in the economy plus exports to Afghanistan to carry on further at an even pace", Umer Bin Ayaz, an analyst at Capital One Research said.
"Even though the overall volumetric sales for the cement companies increased by 25 per cent in July to September 2006, compared to the corresponding period of last year, the fact remains that the actual reward of these capacity expansions had partially been eaten away. We see net margins eroded due to the laggard impact of higher financial charges and low capacity utilisation levels resulting in higher fixed expenditure per ton of sales", he said.
More evidently is the retail prices of cement that has gone down in the wake of supply glut caused by huge capacity expansions, he added. Talking specifically of the southern region, an average decline of 4.3 per cent on month-on-month basis in prices during FY07 was observed that against the average capacity expansions of 0.467 million tons on month-on-month basis, which is increasing the magnitude of supply glut in the country.
Attock Cement experienced an average retail price depreciation of around 4.9 percent on month-on-month basis in FY07 and is currently available at Rs 4550/t which is still highest not only in South but also in the country. Lucky Cement and DG Khan Cement have experienced average retail price decline of 4.7 per cent and 5.2 per cent on month-on-month basis and are currently available in south at retail prices of Rs 4100 per ton and Rs 4250 per ton respectively.
"Looking at the price movements and the supply glut situation, we believe there exists a correlation between the retail prices and supply excess in the economy", Umer said, and added that this correlation was difficult to mark out during the cartel regime, under which the prices were decided by the cartel and not by the demand-supply laws.
Analysing the cement dispatch trend for last 8 years (FY99 to FY06), it was observed that the percentage of second quarter dispatches was the least in both regions due to slowdown of construction activities in winters and significantly low volumes of exports to Afghanistan.
On the other hand, in the third and fourth quarters, the construction activities are usually in full swing, resulting in higher demand for cement in local and export markets, spiking up the share as high as 29 percent of the total year dispatches (incidentally it persisted both during FY02 and FY03).
Only looking at expected hike in cement demand in later quarters, one would think the prices would improve, but looking at a bigger picture it should also consider the new capacity expansions which are yet to come on line later in FY07. "Going forward, we feel the prices would stay on the current levels for the rest of FY07 as increase in dispatch levels as anticipated in third and fourth quarters would be offset by new capacities", Umer said.