Mumbai: Cement production in 2016-17 is likely to see a year-on-year (y-o-y) decline for the first time since 2001 as the 8 November demonetisation hit the building sector, analysts said.
India's cement industry is estimated to have a capacity of about 420 million tonnes (mt). Production typically grows 5-6% a year, and caters to the housing, infrastructure and commercial sectors. The industry recovered from the demonetisation’s shock faster than expected, with the southern markets affected the least, Mint reported on 7 February.
According to HDFC Securities Ltd, production volume in January fell about 13% y-o-y, the first such decline since January 2001. The sector will likely see a decline in volume this fiscal, which was last seen in fiscal 2001, its analysts Ankur Kulshrestha and Sarfaraz Singh wrote in a 2 March report.
“Our channel checks across the country show cement demand, though still weak, is recovering from the effect of this move. Though states undergoing political processes (UP and Punjab) are an exception to this recovery as of now, there is a possibility demand may pick up once the government formation is complete," Kulshrestha and Singh wrote.
It is highly likely this fiscal may end with a marginal y-o-y decline for the cement sector, CLSA said in a 1 March note to clients. “Cement production (as per Index of Industrial Production) declined 13.3% y-o-y in Jan-17 which was the sharpest decline in several months," it said. “For full-year FY17, there is a strong chance industry volumes would be down slightly, a first in over 15 years."
After the government’s demonetisation move, which triggered a cash shortage, cement production growth slowed to 0.5% in November and fell 9% in December—taking production growth for the first nine months of FY17 to a mere 2.6%, according to Ambit Capital.
“Despite cement demand in FY17 being the weakest in 10 years, average prices have increased 5% as they are more of a function of supply moderation and pricing discipline than demand growth," Ambit Capital analysts Nitin Bhasin and Parita Ashar wrote in a 27 February report.
While north, central and west regions will drive prices for the sector, south and east regions will drive demand, Bhasin and Ashar wrote.
Last year, cement makers benefitted from low fuel and commodity costs.
However, prices of coal and petcoke have risen sharply in the past six months, leading to higher fuel costs.
“Though the prices have recovered from the demonetisation lows, they have still not touched the October 2016-levels. The regions that witnessed sharp declines in prices have now seen a recovery, though with some exceptions," the HDFC Securities report said.
H.M. Bangur, managing director, Shree Cement Ltd, declined to comment.
A spokesperson for ACC Ltd declined to comment.
Ambuja Cements Ltd and JK Lakshmi Cement Ltd did not respond to an email query sent on Friday.
“We have a cautious stance on the sector due to our worries on near-term demand which would keep cement prices volatile at the time when energy costs have been firming up," the CLSA note said.