New Delhi: Domestic cement growth is expected to slow down to about 7 per cent in the current financial year as reflected in relatively weak offtake seen during the first fiscal quarter (April to June), investment information firm ICRA said on Monday.
This is compared to 13 per cent growth in cement demand in FY19. Although this is likely to affect cement manufacturers, they are likely to benefit from the fact that average prices for FY20 are likely to be better than FY19 while costs are likely to be lower.
This is likely to support near-term profitability for cement mills, ICRA said in a research note. "In Q2 FY20, the consumption is expected to be on lower side owing to the monsoon season," said Sabyasachi Majumdar, Senior Vice President and Group Head for Corporate Ratings at ICRA.
"However, we expect the demand to pick up in Q3 FY20 with the growth likely to be driven by housing, primarily rural housing and affordable housing, and improved focus on infrastructure segments, mainly road, railway and irrigation projects," he said.
As per ICRA, the cement demand has been weak in Q1 FY20 on account of slowdown in the execution of projects. In April 2019, cement production at 29.2 million tonnes was lower by 12 per cent on a month-to-month basis. In May and June, it declined by 2.1 per cent to 28.6 million tonnes and by 0.6 per cent to 28.4 million tonnes respectively.
The demand was impacted owing to the slowdown in government projects, ahead of the elections and shortage of labour. The same is expected to pick up from Q3 FY20, post the monsoon season and growth of 7 per cent is expected during the current financial year.
Coming to profitability in Q1 FY20, the higher cement prices and lower costs -- power, fuel and freight expenses -- are likely to result in margin recovery.
On the capacity side, ICRA expects around 18 to 20 million tonnes per annum to get added in FY2020. Most of these new supplies are not fully integrated and are largely backed by old limestone mining leases.
Also, the grinding capacity addition is higher in relation to the clinker capacity. Thus the actual production from new capacities is likely to be lower.
While the incremental demand of around 24 million tonnes is greater than the incremental supply, the capacity overhang is likely to keep the utilisation at moderate levels -- 71 per cent in FY20 despite some increase from 69 per cent in FY19.