Mumbai: As Indian cement manufacturers boost production capacity to take advantage of an expected increase in construction activity, concerns are growing of a supply glut that could depress prices and erode profit margins.
Cement manufacturers are expected to add at least 13.3 million tonnes (mt) of capacity in the three months to December. The addition would be four times the manufacturing capacity that was commissioned in the quarter ended September, brokerage India Infoline Ltd said in a 22 September report.
The largest quarterly capacity expansion in many months would mean that supply will likely outpace demand, extending a price decline sparked by the economic downturn that dented the construction industry. The June-September monsoon, when building activity slows, also forced prices lower.
Growth plans: A cement plant in Himachal Pradesh. Cement manufacturers are expected to add at least 13.3 million tonnes of capacity in the three months to December, the largest expansion in many months. Ramesh Pathania / Mint
Cement sales have been declining since August, when sales dropped 3% to 15.44 mt from 15.95 mt in July.
Following the merger of cement maker UltraTech Cement Ltd with Samruddhi Cement Ltd, both part of the Aditya Birla Group, and other firms adding capacity, analysts are predicting a record increase in capacity over the next 12 months, starting with the current quarter, as economic growth accelerates and construction activity speeds up.
In the current fiscal year, cement production capacity is expected to increase by 58.51 mt, at least 50 mt of which would be added between April and December, analysts Archana Khemka, Prasad Baji and Akash Patel of Edelweiss Securities Pvt. Ltd said in an April report.
Delhi-based Cement Manufacturers’ Association (CMA), an industry group, expects a 50 mt capacity addition in 2009-10, more than twice the 21.41 mt added last year and a 66% increase from the 30 mt added in 2007-08.
“However, this is not an official forecast. It is difficult to say how much of the remaining capacity will be added this year,” a CMA official said, adding that capacity had expanded by only 9 mt in April-September. The official did not want to be identified because he is not authorized to speak to the media.
In an 18 September note, Ambit Capital said the cement cycle had peaked. “Anticipated capacity has increased by 23% between financial year 2009-2011, but the relative increase in demand has only been 10%. This is expected to put pressure on cement prices, which in turn will lead to a decline in earnings,” analysts Amit Agarwal and Parikshit Kandpal wrote.
In a note on 31 August, Religare Hichens Harrison Plc analyst Mihir Jhaveri said that in the last two cement cycles, in 1995-97 and 2001-03, cement prices fell by 14% and 17-18%, respectively, due to overcapacity.
“Now too, the sector appears headed for another cyclical correction. Prices have risen sharply over the past three years on account of higher demand and lower capacity additions. But with a drought-hit demand environment and a 57 mt of capacity to be added by FY10, we believe a reduction in prices is imminent,” he wrote in a research note.
Kumar Mangalam Birla, chairman of the Aditya Birla Group, conceded last week that supply would outstrip demand for the next 18 months.
“Supply will be in excess of demand for the next one or one-and-a-half years,” Birla said. “But we expect demand to come from individual property construction and infrastructure.”
In the Andhra Pradesh-Karnataka region alone, more than 20 mt of cement manufacturing capacity will likely be commissioned over the next two years, said S. Sreekanth Reddy, executive director at Hyderabad-based Sagar Cements Ltd.
“Availability of limestone and access to markets are the two main reasons cement capacity is increasing in the south,” Reddy said. “In the next three years, there will be a pressure on pricing for cement companies because demand is increasing by only 10% while supply is expected to double.”
Prices fell more than usual during the typically slow monsoon season, which was preceded by elections to the Lok Sabha and the state assembly.
“In the past few months, price per bag for us has dropped to Rs135-145 from Rs175-180 per bag earlier, and this happened not because of excess supplies, but because elections slowed down the construction activity in the state, and then the monsoon followed,” Reddy said.
Real estate developers and construction companies said prices have to fall further.
Arun Sahai, chief executive of Ahluwalia Contracts (India) Ltd, a Delhi-based firm executing the construction of the 2010 Commonwealth Games Village, said cement supply is “regular”, but prices “must fall further”.
“Cement companies are holding prices due to a sort of cartel that they have. Prices in Delhi have come down to Rs225 per bag from a peak of Rs240-245 per bag. I think it should be lower than Rs200 because their cost price is just Rs150 per bag,” he said.
Rajeev Talwar, group executive director at India’s largest real estate company, DLF Ltd, said cement supply is comfortable, but construction activity has not yet picked up.
“Imports have been allowed from Pakistan and that has allowed prices to moderate. However, as construction activity slackened in 2008, at least 100 m sq. ft less of developed real estate was available in the market,” he said. “It will take at least six-seven months to plan new projects again, which will increase cement demand.”