The Hindu Business Line : Fortunes of cement industry hinge on revival of real estate sector

Starting on a bullish note with prices touching historic high amid buoyant demand, cement industry slipped on to a sticky wicket as the realty sector was rattled by the unprecedented financial crunch.

Caught between the government intention to tame the raging inflation and skyrocketing input costs in May, the industry was given an ultimatum to hold prices.

The then Finance Minister, Mr P. Chidambaram, warned cement companies to reduce price voluntarily. “... I have made it very plain, that, if they (cement manufacturers) do not voluntarily cut prices, we are prepared to take administrative measures.”

Export ban

In a bid to increase supply in the domestic markets, exports were banned though the country shipped less than three per cent of the total production of about 200 million tonnes.

On the other hand, duty-free imports were allowed.

Prices of coal, one of the major inputs for the cement industry, hit new high on supply constraints and good demand in the first half of 2008.

It touched a high of $240 a tonne when the crude oil was hovering $140 a barrel.

Companies responded positively to the government directive to maintain retail cement prices. Cement major ACC agreed to hold the price line for three months in May.

Mr Sumit Banerjee, Managing Director, ACC, had said, “While ACC has been taking all steps necessary to ensure that production is maintained at peak levels, the price freeze will erode the company’s margins.”

During this period, ACC will engage in an open dialogue with the Government to explore viable solutions to combat inflationary trends that have disproportionately increased its input cost.

Interestingly, in less than six months, ACC had to shut down one of its kilns at Gagal in Himachal Pradesh for 15 days in December.

Citing poor demand in Himachal Pradesh and Punjab, the company said on account of the economic slowdown, both these States are showing negative demand of about 8 per cent as compared to last year.

The demand slowdown has resulted in increase of clinker stocks at the Gagal works in HP, necessitating a shutdown of manufacturing operations for balancing the clinker stocks, the company had said.

The plight of cement companies across the board was similar to that of ACC, though the intensity of impact varied.

Capacity utilisation

Most of the cement companies were operating well below their production capacity to tide over the demand slowdown in July, but were still building up inventories.

Capacity utilisation of the industry dropped to a low 82 per cent in the first half of the financial year 2009, against 93 per cent in the same period last year, according to Cement Manufacturers’ Association data.

Though drop in capacity utilisation was partially attributed to the new capacity added, cement companies, off the record, agreed that most of their plants were running well below the optimal level.

The industry was expected to add 35 million tonnes (mt) of capacity in FY09 and another 35 mt of fresh capacity in FY10, against incremental demand growth of 10-12 mt, assuming an annualised demand growth of 5-6 per cent.

At this rate, the industry may be saddled with 40 mt of surplus capacity by the end of FY11 and capacity utilisation is estimated to fall to about 78 per cent from 98 per cent in FY08.

Bleak future

Given the turbulent economic condition and financial crunch, the cement industry has managed to add only 8.16 million tonnes, taking the total capacity to 206.46 million tonnes till November against 198.30 mt capacity recorded in FY’08.

The government recently responded to the industry SOS with a four per cent cut in excise duty across industry and a package for the housing industry, which consumes about 65 per cent of the total cement produced. Unfortunately, the Railways hiked the freight cost marginally, thereby reducing the benefit.

In response to the reduction in excise duty, cement companies cut prices by Rs 4 to Rs 8 for a 50 kg bag.

Demand slowdown

Prices have already come down by as much as Rs 10 a bag in the northern and eastern region due to demand slowdown and imports from Pakistan.

“With the relationship between India and Pakistan turning soar and talks of waging war gaining strength, I personally think this is the right time to stop all economic ties, including ban on imports,” said a cement company official.

Even if the government bans imports, analysts feel, there is little scope for the industry unless and until there is a marked improvement in the realty sector.