The Indian cement industry, which has been witnessing a surplus position for a long time, is likely to see a decline in the extent of the surplus in the immediate to medium-term. This will be more pronounced in the northern and eastern regions as compared to the southern and western regions, according to a recent report by credit rating agency Icra.
While this coupled with recent consolidation in the sector may suggest a price correction, Icra does not expect a significant change on the pricing front, given that the major usage of cement is in a socially important sector and the high level of flexibility enjoyed by the suppliers in increasing production. The report expects cement demand to grow in the medium-term by around 7-8 per cent based on good fundamentals.
Future drivers of cement demand growth in India will be road projects (especially the golden quadrilateral project in which 1600km of road are supposed to be made of concrete) and housing projects (the government is targeting construction of 2M housing units per annum - 1.3M in rural and 0.7M in urban areas). The road projects are expected to boost cement demand by around 4Mta. Housing demand is also expected to remain robust on account of various incentives provided to the sector. Particularly, rural housing is likely to see robust investment as monsoons having been good raising the prospect of higher income.
On the consumption side, the cement sector is likely to witness growth in line with economic growth because of the strong co-relation with GDP. Icra feels that cement companies are expected to continue facing the problem of rising manufacturing costs as they do not have control on external cost elements such as energy and freight.