India's rural boost

As India's cement producers publish their results for the July-September 2020 period (2QFY20-21), we are starting to see the beginning of a new phase for the cement market following a turbulent start to the fiscal.

The underlying and unprecedented rise in demand for the rural regions and amongst individual
home-builders is a particularly bright spot for the sector. The Indian government has also introduced various measures to boost demand, with spending on infrastructure and affordable housing set to support consumption going forwards.

In a country hit hard by the COVID-19 pandemic, rural demand has strengthened at the expense of other sectors. The shift in demand began as migrant labour returned home to rural areas, away from crowded urban spaces. As migrant labour has not yet returned to urban centres, rural markets are continuing to support demand, assisted by a good monsoon season. UltraTech Cement, the country’s largest producer, has seen over 50 per cent of its rural districts report a growth over their past few performances.

While this is expected to be the case for some time yet, urban demand is starting to show signs of reawakening as the country emerges from its lockdown programme.

However, on the production side, recent estimates show that the fall in production for the FY20-21 could be as much as 18-20 per cent YoY, according to CARE ratings. This would be the steepest fall in production that the industry has yet witnessed. Looking at the calendar year, 2020 is expected to record a 13 per cent YoY decline in production from the record figure of 338.92Mt seen last year.

India's monthly cement production (Mt), 2019 vs 9M20

Outlook
The pandemic has created significant levels of uncertainty for the country’s cement market and overall economy, which contracted 23.9 per cent in the second quarter of 2020, according to the IMF. A recent forecast from Moody’s Investor Service indicates a FY20-21 contraction of 10.6 per cent.

Crucially, the latest US$35.14bn economic stimulus package, announced on 12 November, has been designed to focus on several sectors, but significant among these are manufacturing, housing and infrastructure. Measures such as this will be instrumental in supporting cement demand going forwards.

Confidence in the recovery of the sector is demonstrated by many companies including ACC in its earnings report for the 3Q20, where it stated: "The company believes that our country’s economic recovery is underway, and the economy will bounce back strongly in the next few quarters. The government's thrust on infrastructure development, increased spending through measures aimed at reviving the rural economy and a sharper focus on the affordable housing segment is expected to drive strong resurgence of cement demand and bring growth opportunities for the cement sector going forward."