Cement prices usually fall with the onset of monsoon rains — as construction activity slows down and demand wanes. However, this time, the cement industry has nothing to fear from the monsoon. In fact, it will keenly monitor its progress — thanks to two successive droughts in the recent past.
Rural incomes took a hard knock with the onslaught of two droughts, in 2014 and 2015. And this has had a big impact on the cement industry — with despatches dipping to multi-year lows. In the past few years, cement despatches grew just 3-5 percent. Historically, despatches have clocked 7-9 per cent growth — roughly 1.2 times that of the GDP growth rate. However, the growth rate in the last few years has been much lower. This is largely due to the rural market, which is crucial for the cement industry; contributing 40 per cent of overall sales.
If we consider sectoral demand, the biggest chunk comes from home construction. About 60-65 per cent is from housing, while another 15-20 per cent comes from infrastructure and 20 per cent from commercial and industrial investments. With investments into infrastructure slowing down and industrial activity showing little signs of pick-up, housing remains a key demand driver for the cement industry.
Demand drivers
Within rural housing, there are two demand drivers — one as people build more homes, and the other triggered by investment in rural schemes of the government. While the former is primarily driven by a rise in rural income, the latter is boosted by allocation of money to rural schemes by the Centre.
Individual house construction is more important for the cement sector — as it constitutes 85 per cent of the country’s overall rural housing demand. And that’s where the monsoon plays a crucial role; a boost to agricultural income could trigger demand for rural housing; this, in turn, can boost cement demand in the rural sector. After reinvestment into the farm, the next two big investments in the order of importance for rural households are housing and marriage.
In the Union Budget 2016-17, the Centre improved allocation for three rural schemes that could impact cement consumption. Indira Aawas Yojana (IAY), MNREGA and PMGSY, put together, account for 15 per cent of rural housing expenditure. IAY alone constitutes 12.5 per cent of the spend on rural housing.
Housing, road projects
The Centre plans to build 16 million houses over six years, till FY 2022, under the IAY. As per industry estimates, 4 tonnes of cement is required to construct a 30 sq m house. Back of the envelope calculations show that the IAY, on its own, will trigger a demand for 64 million tonnes of cement over the next few years. Cement consumption was around 260 million tonnes in FY ’15.
Also, the government plans to build 12-14 km of road per day. Depending on the type of road, this could trigger demand of 300-1,200 tonnes of cement for every km of two-lane road built. While a cement road consumes the highest (1,200 tonnes), it is less for two-lane bitumen road (300 tonnes). Also road construction activity is highly labour-intensive, eating up 40 per cent of the overall cost of road construction. This has a positive impact on rural incomes too.
Growth hit
The country’s cement industry is the second largest in the world, after China, with a production capacity of 404 million tonnes a year. It was also the second fastest-growing market in the last decade – with an average growth rate of 8 per cent. Many cement players have, over the past few years, also added substantial capacity, anticipating a rise in demand.
However, impacted by drought, despatches were disappointing in the last two years. The industry’s capacity utilisation is currently at multi-year low of 67-70 per cent. Manufacturers are hoping that the monsoon doesn’t play truant this time — for that will hit their fortunes hard.