Cement capacity utilisation falls to new low at 52% in Q1

Mumbai | Updated on July 15, 2020

Despite rise in prices, lower volumes is expected to drag down profitability of cement companies

Capacity utilisation of the country’s top 10 cement companies plunged to a multi-year low of 52 per cent in the June quarter as against 76 per cent logged in the same period last year due to weak demand and logistics restrictions amid Covid pandemic.

The intermittent lockdown announced by different State governments in the most affected regions have forced many dealers to shut shop and bring down their inventory levels.

Manish Valecha, Research Analyst, Anand Rathi Research, said that sales volume picked up in May and June after an almost complete washout in April. The demand from irrigation projects in rural regions and rush to complete projects that are in last stage before the onset of monsoon helped salvage sales in the June quarter, he added.

Increase in prices, dip in demand

In order to protect their profitability, cement companies raised prices even as sales volumes plunged with infrastructure projects coming to a standstill and the demand from housing sector hit by labour shortage.

Although construction activities resumed partially with ease in lockdown restrictions, lower demand ahead of monsoon arrival weighed on production. Despite rise in prices, lower volumes is expected to drag down profitability of cement companies.

Rajesh Ravi, Research analyst, HDFC Securities said that cement companies took price hikes across regions largely in April and May to moderate the impact of the drop in sales volume. However, he added the price hike remained almost flat compared to the same period last year.

The lower capacity utilisation had pushed up the operational cost despite fall fuel and raw material cost. With the onset of South-West monsoon and persisting labour issues in housing projects, the demand is expected to remain subdued in the September quarter.

Amid weak demand, the installed capacity of domestic cement manufacturers has increased at a compounded annual growth rate of 7 per cent in last five fiscals. The installed capacity of the industry jumped 14 per cent last fiscal to 545 million tonne against 480 mt logged in FY19.

The industry has been on a sustained growth path adding capacity, driven largely by the construction sector and the ambitious infrastructural projects announced by the government. The capacity utilisation levels have fallen to 61 per cent last fiscal against 70 per cent in FY19 due to fresh capacity being added amid weak demand. Cement production last fiscal fell by 0.8 per cent against a growth of 13 per cent in FY19.

Published on July 15, 2020

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