The 205-million-tonne cement industry is worried about the nearing oversupply situation and sinking demand, which are exerting pressure on its earnings, sales realisation and margins.
The housing sector, which accounts for about 65% of cement consumption, is witnessing a slowdown. Dearer home loans and high real estate prices are leading to a decline in housing affordability. With the key user sector experiencing a slump, an oversupply situation in the cement industry is on the horizon. This would lead to a further decline in cement prices declining, which in turn affect the profitability of cement companies.
According to Pawan Burde, an analyst at Angel Broking, ?As per the announced capacity addition plans by the major cement players in India, 46.4 million tonnes of capacity would be added in FY09 and another 40.1 million tonne in FY10. Even if we assume only 80% of the announced capacity (86.5 million tonne) to come on stream, it will be huge capacity addition (of about 69.2 million tonne) over the next two years, which would be enough not only to absorb any incremental demand but would result in an oversupply kind of situation despite the expected 8% growth in cement consumption.?
Cement majors like ACC, Ambuja Cement, UltraTech had, during their financial results, said that the industry foresees tough times ahead.
?There is a visible slowdown in the real estate and infrastructure sector on account of the current liquidity crisis. This has resulted in a slackening of demand for cement. The situation is further aggravated by the continuous reduction in linkage coal availability and no new linkages in operation. All of these pose a challenge to the cement industry,? UltraTech said in a statement during its Q2 results.
Apart from the falling demand and oversupply situation, reduction of coal linkages is another area of concern for the cement industry. The fixed price coal linkage for the cement companies is declining constantly. As per the new coal distribution policy, the existing core and non-core sectors have been reclassified into regulated and other sectors for prioritising coal distribution. Thus, now the regulated sectors for distribution of coal are power and fertilisers, with steel and cement sectors classified into other sectors.
Thus, consequent to the new policy, the fixed price coal linkage for cement declined significantly to 57% in FY08 from 63% in FY03, which forced the cement players to rely on coal from the open market.
