27 September 2017 10:48:00 IST

Cement prices could improve in the second half

Progress in Govt projects and pick-up in construction activity after the monsoon will spur demand

Cement prices in the country have been correcting in the last four months with the onset of monsoon, during which construction activity usually slows down. Moreover, implementation of GST suppressed the demand from both housing and infrastructure projects. The All-India average price of the commodity is ₹300-305 for a 50-kg bag, after having declined 1.9 per cent over the last year.

Rural housing (40 per cent), urban housing (25 per cent) and infrastructure (20 per cent) are major demand drivers for the industry. Rural housing, which was hit by demonetisation, is yet to see signs of a pick-up. However, with monsoons remaining normal and kharif production about 2.8 per cent lower than the record harvest of the previous kharif season, rural income is expected to get a boost. Whether this will result in buying of high-ticket price items such as houses remains a million-dollar question.

Real Estate Act impact

Urban housing was also hit hard with the implementing of the Real Estate (Regulation and Development) Act, 2016. RERA, which became applicable from May 1 this year, made builders shelve new launches and focus on RERA compliance to remain in business.

However, the silver lining in all this has been the mushrooming of affordable housing across the country. Thanks to the Centre’s ‘Housing for all by 2022’ initiative that exempted developers from taxes on profits for affordable housing projects, about 70 per cent of the first half-year launches in 2017 were in the price bracket below ₹50 lakh. The initiative got a further leg-up with Budget 2017 granting such projects infrastructure status as well as stretching the construction time limit from three to five years.

Correlation with economic growth

Cement demand has a strong correlation to economic growth — with a 1 percentage growth in economy resulting in a 1.2 per cent growth in demand for cement. Since 2001, cement demand has grown at about 8 per cent annually. However, the last four years have been an anomaly — when cement demand clocked average annual growth rates of only 4 per cent.

India Ratings expects the cement industry to grow at 4-5 per cent y-o-y in FY18, largely driven by the demand stemming from infrastructure activities and a revival in housing demand in rural areas, both led by government spending. It expects a 38 per cent and 23 per cent increase in the allocation of funds towards the housing sector under Pradhan Mantri Awas Yojna and expenditure by the Ministry of Road Transport and Highways, taking this to ₹29,000 crore and ₹64,900 crore, respectively; this is expected to boost cement demand in FY18.

PM’s housing scheme

The Centre plans to construct 16 million houses over a period of six years till FY 22 under the Pradhan Mantri Awas Yojna scheme. As per industry estimates, 4 tonnes of cement is required to construct a 30 square-metre house. Back-of-the-envelope calculations indicate that this could trigger demand for 64 million tonnes of cement over the next few years, while cement consumption is now around 260 million tonnes a year.

Road projects, which got a leg-up with the introduction of HAM (Hybrid-Annuity Model) of financing by the government, could further spur cement demand. The Government is laying 22 km of road per day. Depending on the type of roads, it triggers demand anywhere from 300-1,200 tonnes of cement for every kilometre of two-lane road being built.

Roads and highways

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, constituting 40 per cent of overall cost of road construction. This, in turn, has a positive impact on rural income.

Moreover, with the monsoon season almost over, construction activity is expected to pick up. Brisk progress in government-led infrastructure and urban development projects will be important to keep demand high. And with the upcoming Assembly elections in Gujarat, Madhya Pradesh, Rajasthan and Karnataka in the next 12-18 months, pre-poll based spending could act as further demand trigger. In all, the second half of 2017-18 is expected to be better for the cement industry, if all goes well.