Cement: Checking expectations

Despite a month-on-month downtick in cement industry dispatches during Oct-23 which is likely seasonal in nature, in 4MFY24, cumulative offtake is up 14 percent carried forward valiantly by fast improving exports that are up 78 percent from last year. Domestic markets were slower—offtake up 8 percent. By comparison, exports have become far more important and they are delivering—up from last year’s sombre 10 percent of total offtake to 15 percent in 4M of FY24. Last year, demand was struggling to breathe above water, not only in the domestic markets but also in exporting destinations, both north and south of the country. There is a visible shift now.

This is in spite of the fact that many demand side factors posing significant perils to cement capacities. For one, the surging costs of construction, combined with other inflationary pressures have dampened sentiments in the private sector. Most construction it would seem is being carried out in the development and infrastructure projects that have been on-going and long-term projects. Evidently though, the worse may be behind industry players as average monthly offtake (thus far) is well above last year, and years before that, safe for FY21 and FY22 when construction industry was booming. However, since new investments have been made to raise capacities—both Greenfield and brownfield—current offtake is not optimizing capacity utilization.

There aren’t great pressures on price to be reduced as cement players seem to be keeping their cool (and market shares intact). Though coal prices are heading north, the industry has multiple sources to procure coal from and use in the mix which has improved efficiencies. When imports are expensive, they utilize Afghan coal and locally procured coal which can be sufficient for their needs; others closer to the sea ports weigh out their options and make procurement decisions accordingly. Timely decisions based on close estimates of future demand (and inventory needs) have in the past benefitted many a players in maximizing their margins. Exports meanwhile are performing better due to rupee depreciation though exchange rate continues to be erratic which can affect competitiveness, though better coal pricing always helps in that area of concern.

Though cement industry will grapple with subdued capacity utilization over the next few months, and despite persistent macroeconomic pressures squeezing demand, the industry may have left last year’s doom in its rearview, which is the major takeaway and motivation for cement players. For consumers and home builders though, the struggle is real—inflation expectations are high and incomes seem stagnant which only means they will be diving deeper into their savings if construction has to be done immediately. Others will wait for a less rainy day.