Commodity Analysis

‘Budget builds demand for cement’

Muthukumar K | Updated on January 13, 2018 Published on February 19, 2017




Focus on infrastructure and housing and increase in allocation are spurs

The Budget’s thrust on infrastructure and the rural sector is expected to increase cement consumption on a sustained basis, according to Vijay Patil, Executive Director, Dalmia Cement (Bharat) Limited. However, the progress of the projects and the rate of execution is key. Going ahead, he expects cement prices to strengthen as demand picks up with the start of the peak season for construction. Excerpts from the interview:

What is the impact of the housing and infrastructure thrust in the Budget on the cement sector?

The Budget has given the necessary focus on the infrastructure and housing sectors. About 15 per cent increase in capital outlay for infrastructure projects will help create cement demand in roads, railway projects, irrigation and port projects. The national highways projects and rural road projects that were launched in the earlier years are being implemented and this is helping cement offtake.

Affordable housing being given infrastructural status in the Budget will provide impetus to this sector which has a high need and demand. In addition, the interest subsidy incentives for affordable housing finance will provide boost to affordable housing. There are already several project launches in this category. The continued effort of the Government to boost rural development has been re-emphasised in the Budget. Two major initiatives — ₹23,000 crore for PM Awas Yojna and the development of 300 urban clusters — will play an important role in achieving this objective.

In addition, higher allocation to MNEGRA scheme will increase rural income and have a catalytic effect on rural consumption. These measures will help the cement industry as it will lead to increased and sustained levels of cement consumption. However, the progress of the projects and the rate of execution will determine growth in cement demand.

Where are the prices headed over the next one year? Could you give us a regional perspective?

In the South, cement prices have been more or less stable this year. In the East and in the North, the prices have remained weak the entire fiscal year. This has been due to low cement demand growth (demand was almost flat compared to previous year) as well as some new capacities that were commissioned.

Going ahead, cement prices should strengthen as demand picks up due to start of the peak season for construction.

When will demand recover to 6 per cent growth levels?

The drop in cement offtake in November-December due to the demonetisation effect has returned to levels prior to demonetisation. In the current fiscal, the all India growth till December 2016 has been low at about 3 per cent. The implementation of the ongoing infrastructure projects as well as new projects announced in the Budget will improve growth. With the expected revival in rural economy due to good agricultural output, supported by rural housing projects, rural roads etc, rural cement demand should improve. The urban organised housing is still going through a slowdown; however, we expect construction work to improve in the next fiscal.

To what extent has demonetisation affected the sector? When do you expect it to return to its pre-demonetisation condition?

The impact of demonetisation on cement trade was varied across different regions. It was minimal in the South and West as compared to the North and East.

However, the positive outcome of the demonetisation has been that many dealers and consumers are shifting towards increased use of non-cash transactions, showing signs of structural change in the market.

Do you expect more consolidation in the sector? How would it affect pricing of cement in various regions?

Consolidation in the industry is an ongoing process and will keep happening as and when cement companies find strategically attractive options.

Cement prices are more related to the demand-supply situation, the prevailing general economic environment, as well as trends in inflation of raw material and energy prices, and government taxes.

Has the industry demand-supply gap peaked? Your views on the overall demand-supply situation.

The new cement capacity addition has now relatively slowed down in many regions, both due to existing high capacity as well as longer gestation period for new projects due to delays in land acquisition, mining rights environmental clearances, etc.

There are very few greenfield projects under construction in South, West, Central and North regions.

Any new project announced henceforth will take 4 to 5 years to take off. This will help reduce the existing demand-supply gap as cement demand grows.

Published on February 19, 2017
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