Indian cement makers are pouring money into new capacity as builders race to meet orders for new homes and roads for an economy growing by eight per cent a year – reports Reuters.

Nearly 2Mt of cement capacity will be added in the next three years, on top of an existing annual 152Mt, to meet anticipated annual demand growth of 10 per cent. Analysts said delays in adding new capacity might actually help India’s larger cement companies, which have already increased earnings by an average 14 percent in the past three years, outpacing a 10-year average of 10 per cent.

Because of the long lead-time to add plants, no significant extra capacity is due until 2007, and that should keep prices high, underpinned by the market’s lack of slack and strong demand.

"Broadly, the good times should continue," India’s First Global Securities said in a report. "For a while at least."

The market’s potential is big. Per capita cement consumption in India, at 115 kg (254 lb), is half the world average of 253 kg and well short of 659 kg in neighbouring China, analysts said.

Housing accounts for 60 per cent of India’s cement consumption so higher urban incomes, tax concessions and lower mortgage rates of about eight per cent should drive demand, along with government plans to spend billions on roads, bridges and sea ports.

"We have never seen such a focused approach towards infrastructure investment by the government and it bodes well for the industry," broking firm IL&FS Investsmart said in a report.

Morgan Stanley Equity Research estimates India’s infrastructure spending, also including airports and road fly-overs, to grow 19 percent annually to $4 7bn by 2009.

India, the world’s largest cement market after China, has 55 cement companies running about 365 plants.

Many have announced plans to increase production, including Grasim Industries Ltd. , Gujarat Ambuja Cements Ltd, Associated Cement Companies Ltd. (ACC) as well as minor players such as Shree Cements Ltd. New market entrants Nirma Ltd. and Murli Agro Products Ltd. have also lined up new cement plants.

Risks for the industry include pricier input caused by costly freight and energy. Big cement producers’ profits fell short of market forecasts last quarter due to spending on coal and power. Some analysts also fear expansion will create a glut in a few years, but industry officials say buyers will snap up all that they can produce.

"Given that the incremental demand is about 10Mt a year, industry should have no worries about excess supply," said MK Singhi, executive director of Shree Cement. A fall in exports to the Middle East in the next few years may also lead companies to divert supply to the domestic market.

India is set to ship 4Mt of cement across the Arabian Sea in the year to March 2005. But Nilesh Shetty, analyst at Pranav Securities Ltd., expects that to slow as an estimated 30Mt of new capacity in the Middle East is added in the next two years.

Rising cement demand in India has helped producers raise capacity utilisation to nearly 85 per cent this year and analysts expect that to hit 94 per cent in the year to March 2007.

The increased utilisation and better prices are expected to improve margins of leading players in the next two years. First Global said efficiency gains were likely to be significant for ACC, India’s second-largest producer, because of management changes after Swiss cement maker Holcim bought 34.8 per cent.

UltraTech Cement Company Ltd. should be helped by its new owner Grasim, the industry leader, while Indian Cements Ltd, a dominant player in south India, was likely to improve its profit margins, First Global said.

Published under Cement News