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The cement industry hasn’t been granted its specific demands from the budget, but it still has more than one reason to be happy with this budget. The industry’s long pending request for a single duty structure hasn’t been addressed. However, substantial allocations towards roads (Rs 37,000 crore), plans to develop 100 new satellite towns, airports in tier II/III cities, 16 new ports as well as the promise to build rural infrastructure, should all translate into a boom in construction activity which should augur well for cement demand. These initiatives could lift demand growth for the sector from 3 per cent in 2013-14 to 6-9 per cent over the next couple of years. If the new long-term funding avenues for infrastructure do kick-start the investment cycle, that will be a bonus. Qualitatively, removing the impediments to infrastructure projects, the handsome allocation to NHAI and other measures should aid cement demand too.
All the leading cement players with an urban and rural presence should benefit from these developments. UltraTech Cement, Ambuja cement, ACC, Shree Cement and India Cements would stand to gain.
Costs to rise
The cement industry may continue to face cost pressures though. In 2013-14, cement players faced operating margin erosion of about four percentage points due to higher transportation costs, higher cost of imported coal on depreciation in rupee and increase in flyash costs. Though players were clamouring for concessions on these inputs, it has fallen on deaf ears. While their demand for removal of import duty on pet coke has been brushed aside, customs duty on coal has actually been increased slightly. All types of coal including thermal coal used for power generation by cement manufacturers will now attract 2.5 per cent basic customs duty and 2 per cent CVD (versus 2 per cent basic customs duty and 2 per cent CVD earlier). Also, the clean energy cess has been increased from ₹50/tonne to ₹100/tonne. With these new levies and with the 6.5 per cent increase in railway freight charges recently, cost pressures may continue for cement makers. Total cost increases may be around ₹7-7.5 per bag.
Pricing power
But if demand does pick up dramatically from here, based on the construction binge, existing cement players should be able to improve capacity utilisation. Capacity additions are estimated to drop from around 20 million tonnes in 2014-15 to 15 million tonnes in 2015-16 and 12 million tonnes in 2016-17. This will give players higher pricing power to ward off cost pressures. Cement prices have already been rising in the last two months following higher retail demand on delayed monsoon. The increases have been very sharp and in the tune of 6-12 per cent, i.e. around ₹20-15/bag.
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