As post-covid demand cements itself, this sector is eyeing a shift in gears

Cement demand arises from three segments: housing, infrastructure, and industrial and commercial. While housing remains the largest consumer of cement, the share of infrastructure has increased from 20% in 2012 to 28% in 2023, as the government rolled out a slew of infrastructure projects, including roads, rails and ports. (Bloomberg)
Cement demand arises from three segments: housing, infrastructure, and industrial and commercial. While housing remains the largest consumer of cement, the share of infrastructure has increased from 20% in 2012 to 28% in 2023, as the government rolled out a slew of infrastructure projects, including roads, rails and ports. (Bloomberg)

Summary

Cement producers are building capacity as they expect demand to grow. But they have to consolidate to have better control over pricing.

Cement producers have benefited from the post-covid surge in the housing market, which accounts for nearly 60% of the sector's revenues. Among the cement companies whose shares are listed on stock exchanges, four of the top seven by market capitalization outperformed the BSE Sensex in the past year. 

Anticipating continued growth in housing demand, industry and infrastructure, the sector is rolling out large-scale capacity expansion, which could create excess capacity and depress prices. To counter that, bigger players are stepping up on consolidation to have better control over pricing.

In 2020, when the covid-19 pandemic set in, the number of housing units sold in the top seven cities dropped 47% to 138,000. However, over the next three years, housing sales increased 70%, 54% and 30%, respectively, to reach 476,000 units in 2023.

That momentum has continued into 2024. In March alone, housing sales in the top seven cities increased 41% compared to March 2023, according to real estate portal PropTiger. Additionally, after the pandemic, there has been demand for larger houses in big cities, as customers accommodated working from home.

In the US, commercial real estate prices have crashed, in part because of the work-from-home phenomenon. In India, however, commercial real estate is picking up too. It’s projected to grow 7-8% this year, according to real estate consultant Knight Frank. 

During his recent visit to India, Blackstone chief operating officer Jonathan Gray said India was “probably one of the few markets in the world where we've seen rents grow and vacancies decline in the last 12 months".

Infrastructure boost

Cement demand arises from three segments: housing, infrastructure, and industrial and commercial. While housing remains the largest consumer of cement, the share of infrastructure has increased from 20% in 2012 to 28% in 2023, as the government rolled out a slew of infrastructure projects, including roads, rails and ports. 

In a report published last month, stock broking company Prabhudas Lilladher estimated the 13 high-speed rail projects that are planned will generate a demand for 80 million tonnes of cement; the sector’s annual capacity in 2022-23 was 583 million tonnes.

Similarly, it estimates ongoing metro rail projects, covering about 630 km, will need 24 million tonnes of cement. Some of these projects—such as Bharatmala Pariyojana, which involves the construction of 26,000 km of economic corridors, 8,000 km of inter-corridors, and 7,500 km of feeder routes—could have second-order benefits, further spurring cement demand. Cement companies are banking on these projects picking up speed post the national election.

Capacity build-up

The cement industry is expected to build capacity faster in the coming years compared to the past. Total capacity is expected to increase by 123 million tonnes per annum between 2023-24 and 2026-27, compared to an increase of 98 mtpa between 2020-21 and 2023-24, according to Prabhudas Lilladher.

However, this growth in supply might not be immediately followed by growth in demand, leaving unused capacity. The excess of supply over demand is projected to increase to 221 mtpa by 2026-27, as compared to 191 mtpa in 2022-23 and 75 mtpa in 2011-12. 

Managing capacity utilization will be key for cement players in the coming years. Larger players are better positioned to leverage utilization rates, giving them an advantage in a fragmented industry. According to a projection by Crisil, 50-55% of all the capacity additions expected to be commissioned in 2024-25 will be by large players.

Scale advantage

The average quarterly Ebidta per tonne of cement (essentially, operating revenues minus operating cost) has increased from 600 in 2022-23 to 765 in 2023-24. This is still lower than 926 in 2021-22, according to IDBI Capital. This has placed smaller players at a disadvantage relative to their larger peers. 

"Skyrocketing energy costs over the last two fiscals hurt profitability and balance sheets of players. This led to consolidation in the sector as large players acquired those struggling to compete amid high costs," Crisil said in a recent report.

As per Crisil, the capacity share of large players has increased from 45% in 2017-18 to 48% in 2022-23, partly due to mergers and acquisitions. Consolidation is expected to continue, as producers seek more pricing power. 

Companies reportedly increased the price of a 50-kg cement bag by 10-15 earlier this month, and further hikes could be in the offing after the elections.

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