Core push to keep cement demand intact

Core push to keep cement demand intact
The Economic Times, August 19, 2009, Page 7

Higher Infrastructure Spend, Improving Housing Market In Metros To Blunt Effect Of Weak Monsoon On Industry

Sanjeev Choudhary NEW DELHI

THE cement industry that saw rural demand driving its impressive 12% growth last fiscal, does not foresee any significant impact of a weak monsoon on demand. It believes a higher government infrastructure spend and an improving housing market in metros may offset any fall in rural demand because of a weak monsoon.

Analysts though believe a weak rural demand coupled with new cement capacities may put pressure on prices.

“The second half of this fiscal may see rural demand for cement getting impacted partly because of lower disposable income at the hands of farmers due to a poor monsoon,” says Jaiprakash Associates CFO Rahul Kumar. Jaiprakash Associates, which has an installed capacity of 14 million tonnes per annum, mainly operates in Madhya Pradesh, Uttar Pradesh and Bihar.

Mr Kumar says impact on rural demand for cement could be higher in Bihar and eastern Uttar Pradesh, where dependence on rain for farming is higher compared with Haryana or Punjab, where irrigation facilities are well-spread.

He though hopes that a shortfall in demand caused by a weak monsoon or drought may get offset by government projects and improvement in the housing market.

The cement sector has seen a robust growth in the past several quarters. As per data published by the Cement Manufacturers Association (CMA), cement production and despatches grew 12% and 11.7%, respectively in the four months to July this fiscal year. Last fiscal saw an unusually impressive growth of 12% for the cement sector, despite GDP growth slowing to 6.7% on higher government infrastructure spend and rural demand.

CMA president and Shree Cement MD H M Bangur says on a long-term average basis cement has grown 1.3 times the GDP growth numbers. So if GDP were to grow by 7%, the cement industry can safely be assumed to grow by over 9%, he says, adding that a weak monsoon may impact cement growth by hardly 1-2 percentage points this year.

The cement industry has a total installed capacity of 227 million tonnes per annum, including 8 million tonnes added in the four months to July. The industry expects to add another 20 million tonnes this fiscal. “An oversupply in several regions coupled with lower household income in rural areas will put pressure on prices,” says Rupesh Sankhe, a cement analyst with Centrum Broking.

South India’s largest cement maker India Cement however doesn’t agree. “We will have to wait and see how prices move in future,” says India Cement MD N Srinivasan, adding that analysts have been proved wrong several times on predicting oversupply.

He also believes that a weak monsoon will not erode demand as most households have multiple sources of income. Mr Srinivasan though is cautious on the impact of inflation. “If the government were to divert funds meant for infrastructure expenditure towards giving food subsidy to poor people, infrastructure spend will come down leading to lower demand for cement,” he says.