Virtual glut in cement market
Most of the top manufacturers invested heavily in expanding capacities; now with the additional supplies, there’s a virtual glut in the market and prices have started heading southwards. When cement prices shot up earlier last year, the Indian government pulled up manufacturers and warned of action.
In fact, the government opened up duty-free cement imports from Pakistan, and also imposed curbs on the export of the commodity from India. But now with the situation having undergone a 360-degree turn, the government has imposed countervailing duty (CVD) - of over Rs400 a tonne – on imported cement, virtually bringing an end to imports from Pakistan.
Imports from Pakistan had peaked at 150,000 tonnes a month during the first-half of 2008. But from October, imports began slowing down and by December it had fallen to 75,000 tonnes.
“We welcome the move as our long pending demand has been met,” says H.M. Bangur, president, Cement Manufacturers’ Association (CMA), and managing director, Shree Cement. Imports from Pakistan had flooded the north Indian market over the past few months, hurting domestic producers. The landed cost of cement from Pakistan was initially around Rs145 for a bag (of 50 kg). The price of cement in north India fell by almost Rs10 a bag, following imports from Pakistan.
The new levies work out to about Rs20 for a 50-kg bag of cement from Pakistan, which is now being sold for around Rs225 a bag. Domestic cement is also available at around the same rate, and with prices expected to fall, imports from Pakistan will surely dry up.
For the United Progressive Alliance (UPA) government, under pressure to “take action” against Pakistan, following the November 26 terror attacks on Mumbai and the consequent build-up of a war hysteria, the change in the fortunes of the cement business have come in handy. Halting imports from Pakistan, by imposing CVD, would not result in any howls of protest in India even from consumers. It would of course win the goodwill of the powerful cement lobby.
According to A.L. Kapur, managing director, Ambuja Cement, imports from Pakistan has hit the domestic industry, especially in the northern markets of Punjab and Haryana. The slowdown in the real estate sector will see cement prices fall by another Rs5 to Rs7 a bag. However, if the government bans imports of cement from Pakistan, the decline in cement prices can be halted, he avers.
But contrary to the fears of domestic cement manufacturers, of cheap imported cement from Pakistan flooding the north Indian markets, imports account for less than half a per cent of India’s total consumption. Exports add up to less than three per cent of the total production of 200 million tonnes annually.
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Imports from Pakistan, in fact, have had a marginal impact on domestic producers, contrary to what many of them claim. What has hurt them is the slowdown in the real estate and infrastructure sectors in recent months.
According to the Centre for Monitoring Indian Economy (CMIE), a leading think-tank, imports and exports account for a very insignificant portion of total cement produced in India. The demand-supply dynamics of the domestic cement industry are unlikely to be significantly affected by the withdrawal of the export ban and the re-imposition of CVDs on imported cement, it feels. What will be of far more significance is a revival in demand from the real estate sector.
The CMIE states that the short-term demand outlook for cement continues to remain weak and the downward pressure on prices will continue. But this is unlikely to boost the realty sector, which accounts for 65 per cent of cement consumption in India. The Indian real estate sector is also dependent on the IT/IT enabled Services sectors, which are also witnessing a slowdown.
Aware about the need to boost the real estate and cement sectors, the government had unveiled a series of steps in two fiscal stimulus packages announced recently. The Reserve Bank of India (RBI), the country’s central bank, has accorded priority sector status for housing loans up to Rs2 million.
The government has also cut excise duty on cement by four per cent, which most producers have passed on to consumers. But the continuing recession in the west has seen many leading developers being starved of funds.
When the real estate sector was booming last year, private equity funds and other foreign institutional investors were pouring billions of dollars into the Indian realty business. However, many of them have pulled out their funds, seeking opportunities in the US and Europe where companies are available at rock-bottom prices.
Indian developers have had to take desperate measures to ensure continuity of their projects. Demand has slackened, commercial office rents are declining in most cities, and buyers are adopting a wait-and-watch attitude. So despite the fall in cement – and steel, which has tumbled by over 40 per cent – prices, the real estate industry is unlikely to revive over the next few months.
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THE outlook for the Indian cement industry appears bleak even on a mid-term basis. In the first half of the current fiscal (April to October, 2008) capacity utilisation fell to 82 per cent, as against 93 per cent in the same period during the previous fiscal, according to the CMA.
In the current fiscal – which ends on March 31, 2009 – the industry is expected to see production capacity expand to over 206 million tonnes, from 198 million tonnes in the previous fiscal. Additional capacities are being added and over the next two years, the industry expects another 70 million tonnes of fresh capacity.
Demand, however, is expected to grow at around 25 million tonnes over the next two years, leading to excess capacity of about 40 million tonnes.
Cement prices shot up last year, when commodity prices flared. Coal, one of the basic inputs for the cement industry, had touched $240 a tonne; even shipping charges for imported coal had broken previous records. Coal prices are now down by 60 per cent and freight charges too have stabilised.
Consequently, the average price of cement in India declined to Rs234 a bag (of 50 kg) in December, and is expected to continue falling. At present, it ranges from Rs215 to Rs235 a bag, depending on the location (in coastal cities like Mumbai, located in proximity of cement plants, the price is low; the price is higher in cities in the hinterland).
Cement despatches also rose to 16.01 million tonnes in December, as against 14.34 million tonnes in the previous month. Production was also up by 10 per cent to 15.82 million tonnes. But the full impact of the real estate slowdown is expected to be felt in 2009. Already, ACC, one of the largest cement producers, has been forced to shut down its unit in Himachal Pradesh, as inventories have started piling up.
Says Sumit Banerjee, managing director, ACC: “I believe that the worst is yet to come. The first half of 2009 will be better than the second half.”
Several sectors of the economy are expected to see a sharp slowdown in growth in the last quarter of the current fiscal and in the first two quarters of 2009-10. Already, the growth rate of the six core infrastructure industries – crude oil, refinery products, coal, power, cement and finished carbon steel – have halved, according to figures of the commerce and industry ministry.
They saw a growth rate of just 2.2 per cent in November, as against 5.1 per cent in the same month in 2007. The cement industry fears that the slowdown will coincide with the slide in cement prices, squeezing margins this year and the next.