Economy

Base effect exaggerating Nov cement, steel output; sectors still not out of woods

Twesh Mishra New Delhi | Updated on January 08, 2018 Published on January 04, 2018

High debt levels in steel sector, excess capacity in cement still worrying: analysts



The 13-month high core sector growth at 6.8 per cent during November 2017 has been driven by a 16.6 per cent increase in steel and 17.3 per cent spurt in cement production over November 2016.

But is this growth indicative of a revival of the steel and cement sectors?

Not really. Analysts note that core sector growth during November 2016 was hit by demonetisation and had plunged to 3.2 per cent. “The robust production growth in cement and metals for November 2017 as highlighted by the Ministry of Commerce and Industry can be attributed to base effect and anticipation of pick-up in construction activities post festivities and waning transitory impacts of GST.

“Notably, construction activities were impacted last year, post the announcement of demonetisation led by channel disruption and cash crunch in the system,” Binod Kumar Modi, Senior Research Analyst Cement & Construction sectors, Reliance Securities, told BusinessLine.

Infrastructure projects

Modi said that the driver of growth in November 2017 was the gathering traction in infrastructure projects. But, the growth is still not substantial.

“Gathering traction in irrigation, affordable housing, metro, roads and highways projects are aiding pick-up in consumption of construction materials, namely cement and steel. We continue to believe that further likely acceleration in rural economy and infrastructure development in the country will entail higher volume from cement and metals here on,” he said.

This is seconded by Ranen Banerjee, Partner, Public Finance, Economics and Urban, PwC India. “The push to the infrastructure sector, restart of some stalled road projects as well as the focus on the housing for all scheme are leading to enhanced demand and demand projections for steel and cement. The favourable global prices and economic performance is also supporting the sentiments, and production,” he said. But, the cement industry is not completely enthused.

“Cement is an integral part of many of the government’s flagship initiatives like Housing for All, Make in India as well as its focus on the infrastructure development, especially the highways. Thanks to these initiatives, cement could register a growth of 0.6 per cent in the first eight months of the current fiscal.

“One wonders how long it would take for the excess capacity of the industry (currently to the tune of 34-35 per cent) to be absorbed as till then the investment of over ₹1.20 lakh crore would remain idle,” said Shailendra Chouksey, President of the Cement Manufacturers’ Association.

The steel sector too, is far from the pink of health.

“In the steel sector, the second quarter performance of companies remained fairly stable driven by improving steel demand, higher realisations and benefits of lower coking coal costs. Nevertheless, the high indebtedness in the steel sector continues to remain a credit concern,” said Subrata Ray, Senior, Group Vice-President, Corporate Sector ratings, ICRA.

Published on January 04, 2018

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