Budget 2018 expectations: Cement industry faces challenges, wants GST relaxation

Published: January 30, 2018 11:09 AM

Budget 2018: The Indian cement industry which is the second largest producer of cement globally, has added 110 million tonnes by way of capacity in the past 5 years. FY 2017-18 has been a relatively tough year for the industry, with growth coming in at a muted low single digit.

Budget 2018: finance Minister Arun Jaitley will present the Union Budget 2018 on February 1.Budget 2018: Cement is in the highest GST rate slab, and there is no risk of rate hike as well. (Reuters)

Budget 2018: The Indian cement industry which is the second largest producer of cement globally, has added 110 million tonnes by way of capacity in the past 5 years. FY 2017-18 has been a relatively tough year for the industry, with growth coming in at a muted low single digit. The most obvious cause of this is the slowdown in the housing sector, which consumes about 65% of India’s total cement consumption. FY 2017-18 was also the year of challenges—the ban on sand mining, and use of pet coke, diminished market concentration of industry leaders.

Cement demand is expected to grow by 6-7% to reach 307 million tonnes during FY 2018-19. The number of infrastructure projects planned by the Modi government are now in a phase where we expect work to progress in right earnest. With general elections nearing it is expected that there would be a greater push by all agencies to progress these projects. Building materials like steel, iron, cement, concrete etc. A rise in the prices of these materials will have a huge impact on the construction cost. The cost of cement is about 10%-12% (Approx.) of the total construction cost, the cost of steel is about 15%-20% (Approx.) of the total construction cost, and other materials account for 25%-30% of the total construction cost. The recent mining restriction, the doubling of prices, along with a further hike in input costs is likely to create pressure on cement consumption.

Read also: Budget 2018: Expect the unexpected from Narendra Modi government, says FE Online pre-Budget Survey

Cement is in the highest GST rate slab, and there is no risk of rate hike as well. However, any southward change in GST will lead to a spur in cement demand, and better realizations for the industry. Now cement attracts 28% GST, which means a higher rate of tax leading to increased costs for the infrastructure sector.

Growth in the cement sector in FY 2018-19 would most likely be fairly high as compared to the trend of the previous year. This is likely to be driven by the slew of infrastructure projects that have been announced by National Democratic Alliance-led central government. Chief among these are the Bharatmala Project that seeks to develop 84,000 kilometers of roads by 2022, the Smart Cities Project and the Housing for All by 2022.Despite the infrastructure push, the sector will most likely continue to face some severe headwinds, such as higher fuel prices which may cause an uptick in logistics cost with an ultimate impact on margins. Capacity utilization in the cement sector remains on the lower side which may put pressure on the prices. The industry has made huge investments for potential increase in cement demand. If by any chance this uptick in demand were not to materialize, cement makers will experience a glut situation leading to an immediate and sharp fall in prices.

Watch: Budget 2018: 10 New Facts On The Indian Economy

Perhaps the biggest cause of worry at present is the uncertainty over pet coke imports. Given the demand and supply scenario of domestic pet coke any restriction in import of pet coke would force the industry to resort to coal—a more expensive proposition. In the absence of price elasticity and the inability of the market to absorb higher prices of cement, margins are likely to remain under pressure as well.

The government has taken some great steps to boost investment in the infrastructure sector, including the announcement of marquee projects such as the Bharatmala and PM Awas Yojna. Hopefully, the Union Budget 2018, will provide further impetus on developing rural infrastructure. We expect urban infrastructure, housing, water and sanitation needs to be discussed at the Budget 2018 announcement. The two major areas where we expect the government to drive would be affordable housing and roads & infrastructure. We believe that the government is extremely focused on improving the rural infrastructure.

Read also: Budget 2018: Economic Survey points to difficulty Arun Jaitley will face in reviving capex

While challenges abound, historically, the Indian cement industry has remained prepared for the eventualities. This time around, the industry has answered the government’s call for infrastructure push by increasing production capacity. With a view to have inclusive growth of all sectors, emphasis would be to create demand for real estate sector with focus on affordable housing, government-led higher infra spending in the form of higher fund allocation and incentive for public private partnership (PPP) to keep robust demand for cement. Post GST, industry is also now exploring avenues for optimization in logistics cost by direct supplies, creating hubs to serve distant markets at lower costs.

Specific to cement industry, some sort of tax relief would be most welcome, given the fact that cement is among the highest taxed industries right now, at a slab of 28%. It is expected that Government will consider its legitimate demand of the need to bring down GST slab. Recently, the import duty on pet coke has been increased from 2.5 % to 10%. To boost consumption, it will be helpful if the input costs are kept in check.

Attributed to Yadupati Singhania, CMD of JK Cement

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition