The cement industry, part of the manufacturing sector, plays a pivotal role in the development of India´s infrastructure. The industry growth rate is positively correlated with the country´s GDP growth rate. Key markets for cement are: Housing, constituting around 64 per cent of the total consumption; infrastructure, commercial construction, industrial or others, constituting around 17 per cent, 13 per cent and 6 per cent, respectively. For the past five years, demand has been growing at a CAGR of less than 5 per cent.
Today, Blended cement like Portland Pozzolana Cement (PPC) and Portland Blast Furnace Slag Cement (PBFSC) have about 75 per cent of the market share, whereas Ordinary Portland Cement (OPC) accounts for 25 per cent. Since transporting cement - being a bulky commodity - across the country is unviable due to high logistic costs, the industry is divided into five geographical regions - North, South, East, West and Central. Each region is characterised by its own demand and supply dynamics. Also, the cement industry, unlike other industries, is relatively insulated from global markets with negligible imports and moderate exports.
The industry´s performance for FY15 remained moderate. It was mainly affected by the slow paced infrastructure development, as after Narendra Modi was elected as prime minister, the industry was expecting greater emphasis on infrastructure development. However, efforts remained weaker as in contrast to the expectation - the government was busy in reducing its fiscal deficit that lead to poor government expenditure, further resulting in poor volumes by most companies. Also the private sector spending remained muted. As a result, demand remained weak in the year later and got worse due to weak monsoon, leading to fall in the demand of cement from rural, which contributed 40 per cent of the total sales.
By year-end, the demand was so severe that it compelled cement companies to cut their dispatches by 20-30 per cent, even in the Northern region, which is known to be one of the most stable regions. In the Central India market, prices in Uttar Pradesh and Bihar (key markets for Madhya Pradesh-based producers), fell due to weak secondary sales and the infrastructure sector. The Eastern region´s demand was impacted due to contraction in industrial activities across the resource rich states of the region and poor public spending.
As on date, there is no visible sign of any pick up in infrastructure spending and, as a result, the demand has remained muted. However, a rebound in demand is expected in the second half of FY16 for cement as well, considering that the government spending on infrastructure will rise, further building demand growth for cement pan-India at 6.5 per cent in FY16 and 9 per cent in FY17.
For instance, between FY11-15, the industry added 92 mtpa cement capacities as against 122 mtpa in the preceding four-year period (FY07-11). However, the slowdown in demand (cement production grew by 6 per cent during FY11-15 as against 7.6 per cent during FY07-11) resulted in decline in capacity utilisation from 77 per cent in FY12 to 72 per cent in FY14 despite a slowdown in fresh capacity addition. Assuming a demand growth of 8 per cent over the next two years, cement capacity utilisation across the country is likely to improve from 71 per cent in FY15 to 72 per cent in FY16 to 77 per cent in FY17. That said, the industry will add 28 mtpa capacities during FY16-17.