Rating agency ICRA on Thursday said that it expected cement demand growth to recover to about 5% during 2017-18 as against a decline of 1.2% in 2016-17, driven by a pick-up in the infrastructure segment, mostly road and irrigation projects and the housing segment.
Cement prices recovered from February 2017 and reached pre-demonetisation levels in most markets by April 2017.
While improvement in the supply-demand scenario in FY18 is expected to support the cement prices going forward, sustenance of the same is critical, given the rising costs.
“While in the short term, demonetisation has had a negative impact on real estate and construction activities and hence on the cement off-take, the impact has started to subside from Q1 FY18, driven by a pick-up in the infrastructure segment,” said Sabyasachi Majumdar, senior vice-president & group head, ICRA Ratings.
Further, the increased budgetary allocation for the infrastructure sector, which includes roads, railways, metro, irrigation and housing, during FY18 will directly and indirectly support cement demand.
Also, higher rural credit and increased allocation for rural, agricultural and allied sectors, including the demand for rural housing, are significant contributors to the overall cement demand mix, he added.
ICRA also said in a press statement that sustainability in the cement price trends remained the key to pass on the rising costs by cement companies, which in turn will determine the profitability indicators for cement manufacturers, in the coming quarters.
Drop in production
All-India cement production dwindled by 1.2% YoY to 279.8 million MT in FY17 for the first-time over the last decade. Cement volumes declined between November 2016 and March 2017 by 9% when compared to the corresponding previous, following demonetisation.
However, cement volume growth has witnessed recovery since March 2017 and reported a growth of 17.5% on MoM basis to 25.2 million MT. Prices too have seen improvement across markets, especially since April 2017.
On the other hand, energy and freight costs are under pressure on the back of rising pet coke, coal and diesel prices during Q4 FY2017. While the pet coke prices have been largely stable in Q4 FY2017 on a QoQ basis, they have been higher by around 60% on a YoY basis. Given the large usage of pet coke across companies and the low cost pet coke inventory, already exhausted by the companies, the full impact of higher pet coke prices is reflected in higher power and fuel costs during Q4 FY2017.
Further, during FY2017, coal prices have been higher by 37% on a YoY basis. In addition to this, there has been a nearly 29% increase in diesel prices during Q4 FY2017 on a YoY basis. This has resulted in higher freight expenses for most of the cement companies during Q4 FY2017 on a YoY basis. While diesel prices declined by around 6.0% in April 2017 on an MoM basis, the prices remained higher by around 13.0% on a YoY basis.
“While cement plants from the northern region are likely to pass on the rising power, fuel and freight costs on account of an increase in the cement prices on a YoY basis, the profitability of cement plants from other regions will be contingent on sustainability of prices in these markets,” said Mr. Majumdar.
