Cement industry forecast 2016: Living on a prayer

The cement industry in India, the second-largest in the world, is a study in hope. The sector, which has been facing depressed demand, is hoping that business from government-driven projects will get their engines back into high gear.

These government projects include the Housing for All initiative (on which it plans to spend $50 billion) and the smart city push.

“2016 should be a good year, especially in Andhra Pradesh and Telangana where there is a new capital coming up. With the BJP getting more stable, there will definitely be a push on infrastructure. And that’s a driver for development in any country,” says Rajiv Singla, senior GM-IT, ACC, the second-largest indian cement company by revenue.

It’s mainly the cement manufacturers in the south of the country are banking on the upcoming construction of capital city Amaravati and other road and housing projects in Telangana to help pick up demand. But even if these deals come through, it’s unlikely that they will do much to boost the industry during the next year, because of a time lag, which means that for the first half of fiscal 2016, Indian cement producers will remain under pressure. There is also hope that demands from India’s eastern states create hot new markets of the future, although getting a timeline on this opportunity is hard.

Once cement industry reaches 85% capacity in next 5yrs, we will have a comfortable mkt~ JC Toshniwal, Exec Dir, @wondercement #CementCon2015

According to brokering firm Reliance Securities, “An absence of capex revival in infrastructure and real-estate activities has consistently been hurting demand environment.” The firm expects demand to improve in the second half of 2016.

However, not everyone is as pessimistic. In an interview to the Hindu Business Line, at the end of November 2015, a senior executive at UltraTech Cements, said, “Cement demand is likely to reach the normal level soon with the expected pick up in infrastructure and housing.”

The lion’s share of cement demand is created by the housing market, which is also facing a depressed future. The goods news it that the RBI is expected to lower interest rates in 2016, which could create increased housing demand. 

There are other voices of hope. According to a October Nomura research report in Livemint, “Major infrastructure projects in the country worth Rs 3.47 trillion will need 45 million tons of cement in the next three to four years.”

Analysts polled by Livemint say they expect volume growth to increase by one or two percentage points—from 5-6 percent in 2015 to about 7 percent in 2016 -2017.

A look at the overall picture creates more clarity about the amount of business these large infrastructure projects can bring in. The fact is a majority of the sector’s demand stems not from large infrastructure projects but from the housing and real estate sectors. According to one estimate over 65 percent of the cement industry’s revenues are derived from housing. Infrastructure projects bring in about 13 percent, while commercial and industrial construction contribute a total of 20 percent. These large projects, say experts, might increase the share of business infrastructure brings to the cement industry, but by about 5 percentage points.

In the next 2 yrs, we can expect a significant growth of 3-4% in the #cement industry ~ Jagdeep Verma #CementCon2015 pic.twitter.com/UVo13fuvVc

“The cement business is cyclical. Most of our customers are individual home builders who live in rural market and their income depends on their crops. When crops are goods, cement sales are good,” says Singla.

The lion’s share of the demand is created by the housing market, which is also facing a depressed future. The goods news it that the RBI is expected to lower interest rates in 2016, which could create increased housing demand.

Currently, India’s cement output is about 400 million tons per annum (MTPA), and according to estimates, the sector is working at 70 percent capacity utilization. The industry is still healthy because it has a low breakeven point.

That said, in the last few months have seen two players planning to quit the business. Reliance Infrastructure announced its plan to sell its cement business and according to media reports Jaypee Group has plans to sell its 20-22 million ton cement portfolio to JSW.

While these decisions might have more to do with the individual decision of these companies, the fact remains that in 2016, the cement industry will remain under pressure. 

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