New Delhi: The current corona virus pandemic and the lockdown will result I cement demand gong down by up to 25 percent in the current fiscal and the first quarter of the ongoing financial will be a complete washout for demand of cement.
“In our baseline scenario, cement demand in India would contract by an unprecedented 10-15 percent this fiscal. Extended vulnerability will deepen the damage for the sector to 20-25 percent. On a quarterly basis, cement demand would be a washout in the first quarter of this fiscal, given lockdown measures across India that would hurt construction,” said CRISIL in a recent report.
Cement demand would pick up only from the second half of this financial year. A proper full-fledged recovery in cement demand will take longer because of lower capital expenditure by the government due to diversion of funds to health and public welfare programs. The government-led projects account for 35-40 percent of the demand. Even the weaker real estate and private individual houses and buildings (IHB) housing scenario is going to impact the demand for cement.
The recovery will also take longer due to lower spend on PMAY-Urban as the incomes and the spends are likely to contract.
Quarterly trend in cement demand growth
The lower demand for cement will take the industry’s capacity utilization level down further to about 56-58 percent. This will add to the pain from the weakening witnessed in financial year 2019-20. The incremental supply exceeded demand by 27 MT in financial year 2019-20.
Despite lower demand, the industry had managed a healthy price increase of Rs 25 per bag in financial year 2019-20. This had happened after many years, despite healthy cement demand growth in the previous years. It was helped partly by continued consolidation in the regional markets by the largest player.
The price hike and the lower commodity prices are likely to drive margins to a seven-year high in financial year 2019-20.
In financial year 2020-2021, CRISL expects the price run up to reverse. The cement makers are struggling with lower demand. The drop would be limited to 1-2 percent or Rs 5-10 per bag as cement makers exhibit pricing discipline. However, realisation is expected to fall 2-3 percent as the share of non-trade is likely to increase. Profitability is likely to be under pressure after some expansion last fiscal.