Cement demand fails to take off

Cement demand fails to take off
26 July 2004

Strong demand growth continues to remain elusive for some Indian cement companies, if the data for the first quarter of FY05, recently released by Cement Manufacturers’ Association (CMA) is anything to go by. This shows only a 2.6 per cent growth in despatches in the first quarter of FY05.  At the company level too, cement dispatch growth has been in single digits. Leading producer ACC has seen 0.2 per cent growth, while associate concern Gujarat Ambuja has shown a 5.3 per cent growth in dispatches.  The total growth for this combine is just 2.5 per cent. The other large cement combine - Grasim and Ultra Tech Cement, the hived off cement business of L&T, now controlled by Grasim - shows a better despatch growth of 6.2 per cent.

Difference in capacity utilisation perhaps explains the difference in growth of the two combines. The Gujarat Ambuja-ACC combine appears to have worked at close to 99% capacity utilisation, while the Grasim-Ultra Tech combine has a much lower utilisation of about 83 per cent. In other words, the latter had higher slack capacity, and therefore a greater need to push volumes.

Selling greater volumes may not be a bad idea, at least, in some parts of the cement market. Average prices may have inched up higher in this quarter, against the comparable period a year ago.  The ACC results make this clear. Among the above mentioned large companies, ACC is the only one to have announced results for Apr-Jun ’05 and it shows a smart performance, despite minuscule volume growth.  ACC showed a smart 17 per cent growth in net sales and 84 per cent growth in net profit. So better sales realisations are clearly playing a role now.

ETIG compiled regional sales data from CMA’s report. This shows Southern and Eastern regions were the culprits in holding up cement demand growth. Cement despatches dropped 11 per cent in Southern Region, which accounts for a quarter of the cement market. The Eastern region grew just 2 per cent. Western and northern India showed good demand growth. The Western region absorbed 11 per cent extra dispatches and the northern region took 9 per cent more.  This topsy-turvy performance raises some questions about the long expected pick up in cement demand. Cement demand stubbornly refuses to cross double digits, and actually seems to be falling in recent quarters.

Demand grew an anaemic 5.5 per cent last year, after growing 8.5 per cent and 9.6 per cent in the previous two years. Industry capacity utilisation has thus remained low as capacity addition has outpaced demand in recent years.  The capacity utilisation situation is expected to improve though, as analyst reports indicate that there are no plans for further capacity additions by the industry over the next two years. Thus, reining in capacity growth may be the way to go for cement companies to improve demand-capacity equation.

Published under Cement News