General elections, followed by excess rain and stonewalling of on-ground execution of infrastructure and construction projects dampened the demand for cement in 2019. Consequently, cement prices tapered towards the end of the year.

The all-India average price for a cement bag of 50 kg dropped to ₹329 in December 2019 from its peak of ₹367 in May 2019.

Since the slowdown in construction was due to prolonged delays in land acquisition and other regulatory approvals, an unbridled recovery in demand was not expected in 2020.

However, a rise in State-level construction activities and easing of pollution-related embargoes on construction hinted at a likely marginal recovery for cement demand in 2020.

This, coupled with an unfavourable base in 2019, was expected to result in a healthy growth in cement prices in 2020.

Rightly so, the average pan-India price for cement spiked in January 2020 by 6 per cent y-o-y. The price rise was the most in Northern regions — up by 18.8 per cent y-o-y in January 2020, according to a channel check report by JM Financial.

Cement prices saw an uptick in February as well — the all-India average price was up 2 per cent year-on-year.

Beats lockdown blues

The nationwide lockdown towards the end of March 2020, however, came as a bummer.

With the complete shutdown of manufacturing activities during the lockdown, cement production witnessed a slump.

Just about 10 days of lockdown in March brought down the production volumes by 25 per cent y-o-y. The March quarter, being a seasonally strong quarter for cement manufacturing companies, aggravated the drop in production.

Cement manufacturers were permitted to resume operations in non-containment zones from April 20 onwards. However, the production volumes continued to decline by 85.2 per cent and 21.4 per cent, respectively in April and May 2020, following an anticipated demand slump.

That said, prices remained buoyant throughout the first quarter of FY21. Based on the channel check report by JM Financial, in May 2020, the pan-India average cement price saw a 10 per cent hike over March 2020 levels. The southern region, which witnessed the steepest fall in prices throughout 2019, also saw the largest price hike in May 2020. Prices in the South crossed ₹400 per bag in May — up 24.4 per cent from March 2020.

The next highest price hike was in the East —up 12.4 per cent over March rates.

The price hike was predominantly driven by pent-up demand in rural and semi-urban pockets.

Also, many mid- to large-sized construction players resorted to pre-monsoon stocking up, adding further to the price rise.

With the onset of monsoon, prices in the South and the East saw a correction of more than 3 per cent in June 2020 (m-o-m). On a pan-India basis, the cement price remained flat in June .

According to ICICI Securities, the major drivers for cement demand in the June 2020 quarter were pre-election spending in Bihar, West Bengal and Uttar Pradesh, rehab work (post-cyclone last year) in Odisha, and improved rural/semi-urban housing demand in the East and Central regions. For North, low spells of monsoon aided the volumes.

Road ahead

With seasonality kicking in (generally, monsoons are unfavourable for cement) and the pent-up demand having faded out, cement prices softened in July — pan-India price fell 1.3 per cent (m-o-m).

As per JM Financial’s report, the West region saw the steepest correction — a decline of 3.7 per cent m-o-m, with prices in Mumbai dropping by ₹20-25 per bag. In the initial phases of the lockdown, industry experts believed cement volumes would drop by more than 30 per cent in FY21. However, following the March-quarter numbers of cement majors, JP Morgan now expects the volume drop for the industry to be contained at 10-12 per cent for FY21.

With continuing pricing discipline, cement prices are expected to remain range-bound throughout FY21, barring a slight moderation in the seasonally lean monsoon period (September and December quarters).

However, with sporadic lockdowns continuing in many parts of the country, the downside risks to cement prices remain.

Though construction activities were among the first to be permitted to resume operations post the initial phase of the nationwide lockdown, the exodus of migrant labourers continues to haunt the sector till date.

While the execution of existing orders is witnessing a slowdown on one hand, new order awarding is also expected to remain muted through FY21.

This is because, the Centre and State governments might push infrastructural spends, while prioritising the pandemic, in view of their fiscal constraints.

With weakness in industrial demand, even private capex is expected to witness a downfall in FY21. All these may limit the volumes from urban areas and non-trade segments, which aid the growth of blended realisations for cement manufacturers.

Related Topics
comment COMMENT NOW