In a first in many years, cement demand trails GDP growth

Notwithstanding the falling prices and the supply glut, cement demand has for the first time in several years, lagged the country's GDP growth in the fiscal ended March.

Despite the growing concern over inflation, GDP grew by 8.5 per cent last fiscal against 8.6 per cent in the preceding financial year.

Cement demand

On the contrary, cement demand grew by about 5 per cent, against 10.4 per cent recorded in FY10. The industry despatched 209 million tonnes in 2010-11 against 199 million tonnes in the previous year.

Cement demand grew by 11.7 per cent in the western region, by 10.3 per cent in the eastern region, 9.7 per cent in Central and 3.1 per cent in the North, and fell by 3.40 per cent in the South. In the South, demand in Andhra Pradesh, one of the largest markets, fell by 17 per cent during the year. The cement industry's overall capacity utilisation was 76 per cent during the year.

Cement demand has generally been one-to-two percentage points higher than GDP growth prior to FY10.

Mr Shailendra Choksi, Director, JK Lakshmi Cement, said, “The industry fails to understand this new trend of the widening gap between cement demand and GDP.”

Pointing to China, he said, “the growth in cement demand is two times that of its GDP growth. There may be an anomaly somewhere here, but we hope things fall in place.”

Industrial growth

The poor industrial growth, compared to that of agriculture, might be a reason for cement demand lagging the GDP growth, said an analyst. The slow growth in the industrial production was almost compensated by the 6.6 per cent agriculture output which touched a six-year high.

The impact of slowdown in industrial growth, particularly in the manufacturing sector, can be gauged by the fact that the gross fixed capital formation, which indicates the investment trend in the country, was falling steadily in the whole of last fiscal, he said.

The gross fixed capital formation halved to 7.09 per cent in the fourth quarter of FY11 from 14.55 per cent in comparative quarter of FY'10. In FY11 it was 18.05 per cent in the second quarter and 24.29 per cent in the first quarter. A series of hikes in key banking rates by the Reserve Bank of India had lead to costlier funds for the industry undertaking expansion plans.

“It seems, cement sector is paying the price for misreading the India growth story. Despite the glut in the market none of the cement company has abandoned its expansion projects. We are confident that the demand supply imbalance is a temporary aberration.” said a cement company official.

Poor offtake

The first quarter of this fiscal already appears to be heading for a dismal show, with poor offtake in April and May. Companies are betting on improved demand in June. “Demand remained sluggish in April and May. So far there is no big turnaround. We hope that demand will pick in June before the onset of the monsoon when the demand slows down drastically,” he said.

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