With barely a month to go, the eastern India (Bihar, West Bengal, Chhattisgarh) has not seen any incremental capacity addition this fiscal. But the next fiscal is likely to see capacity addition of 12 million tonnes taking the aggregate capacity in the region to 59-60 million tonnes.
The higher supplies may help the region to become self sufficient for its demand and will likely reduce the huge 15-20% premium at which the cement is sold in the region compared with all India average. As per a latest cement dealers' survey, the prices in East stood at R330-350 per 50-kg bag compared with average of R290-R300 per 50-kg bag elsewhere.
The region has historically commanded a premium of R50-70 per bag on account of relatively better demand growth compared with other region, lower supplies and logistics costs related to transporting cement from neighbouring states.
Analysts believe that with large players focusing on eastern market to build capacity and demand environment unlikely to revive in FY15, the regional cement prices may face stress in the coming months.
Analysis of capacity addition region wise suggests that eastern India is expected to go the south way with FY15 capacity additions at about 25% of total east capacity. With current expansion plans, utilisation in the east is expected to decline from 75% in FY14 to about 67% in FY16 (assuming demand growth of 8% for the next two years), wrote Anubhav Aggarwal and Badrinath Srinivasan, analysts at Credit Suisse in a report last week.
The region has been witnessing cement demand growth of nearly 12% in last few years compared with all India's 7% growth led by low base thereby attracting large cement players to set up capacities. Experts see the demand to moderate a bit in the coming year on account of lower allocation to rural housing programme in the interim budget.
However the cement industry remains hopeful.
"Cement demand has been sluggish for some time considering the state of the infrastructure industry and the vote on account may help may help things slightly. The finance minister has expressed desire to fasttrack large infrastructure projects which is a positive sign," said the spokesperson at Dalmia Bharat Cement.
The duo at Credit Suisse, however, believe that pricing discipline by cement companies may not hold once capacities come on stream. We note that the east is a new region for Shree Cement and therefore we do not expect the firm to participate in production discipline in the region, they said.
Almost half of the 12 mtpa capacity addition in fiscal 2015 would come from Ultratech's 4.8 mtpa Raipur plant and Shree Cement's 1.5 mt plant in Bihar. Further, the year 2016 is also expected to see commissioning of further 6 mt capacity on account of Shree Cement's 2.5 mt plant likely to come on stream by June 2015 and ACC's 3.5 mt plant.