Cement sector slowdown can be longer than expected, says Fitch

Cement sector slowdown can be longer than expected, says Fitch
The Financial Express, February 03, 2009, Page 5

fe Bureau
Mumbai, Feb 2

The 206.96 million tonne cement industry is going through tough times. India, the world’s second largest cement producer, is now expected to exhibit volume growth in the range of 6% to 7% over calendar year (CY) 2010 and most of CY 2011, in line with its GDP growth, said Fitch Ratings on Monday in its cement outlook 2009.

The global rating agency, in its projection for the current year, assigns the sector a stable to negative outlook. The pace of capacity expansion is expected to exceed demand growth over the medium term, which Fitch expects to result in lower capacity utilisation for the sector from current levels, with bulk of the impact being felt in 2009 and 2010 when utilisation rates could potentially dip below 80%.

“Over the past few months, the sector has started showing signs of a slowdown which can be more prolonged than previously expected, reflecting the prevailing trends in key consuming sectors,” the rating agency said.

Meanwhile cement prices have also started coming under pressure over the fourth quarter of 2008 along with new capacities becoming operational. The domestic demand is expected to remain muted, with export demand coming under pressure due to the slowdown in key export markets such as the Middle East.

“The slowing down in demand could increase working capital requirements,” the rating agency added. From CY07 onwards, with most large players undergoing significant capacity expansion, Fitch expects leverage levels to increase moderately, although the risks are partly offset by the expectation of only moderate softening of volumes and margins coupled with strong liquid balances and reserves accrued during the boom.

“We expect most medium and large players to face major issues with regard to fund availability to meet their requirements for capex and higher working capital. However, we believe that smaller entities with poor cost structures and ongoing debt-led capex would be more vulnerable during the current down turn. As far as small players with weak credit metrics are concerned, fund availability could also be a concern,” the report said.