As the domestic cement industry gears up for its last leg of expansion in the current down cycle, analysts see supply glut continuing till fiscal 2013.

The second-largest cement industry in the world had an installed annual capacity of 280 million tonnes by the end of November. Analysts expect it to rise to around 300 mt by fiscal 2012 by when the demand is projected to be 235-240 mt, leaving an oversupply of 60 mt. The current overcapacity is in the range of 30 mt.

Sanjeev Kumar Singh and Divyah Ahooja, research analysts with Centrum Broking, wrote in their report, “The price hike reflects only a temporary respite and it is unlikely to sustain in the medium term to long term as we expect the glut to continue till fiscal 2013.”

Between 2007 and 2010, the industry supply-demand dynamics went haywire with the commissioning of 92 mt capacity, which is about 47% of 195.8 mt added in the last 16 years.

In the last decade manufacturers enjoyed a capacity utilisation rate of 90%, but going forward achieving the same could be difficult, say analysts.
Rupesh Sankhe, research

analyst with Angel Broking, says, “The capacity was 272 mt in fiscal 2010. We expect it to increase to 295 mt in fiscal 2011, around 312 mt in fiscal 2012 and 323 mt in fiscal 2013. On a CAGR basis, the supply growth will be more than demand and at present also the pricing pressure is very high on the cement players and can continue to drag the lag till first quarter of fiscal 2013.”

Between fiscals 2007 and 2010, the installed capacity increased at a CAGR of 16.7% whereas growth in despatches was only 9%. For December 2009 the industry average growth is quoted at 5%.

Antique Brokerage’s morning report on Tuesday says, “Against the earlier estimates of 10-11% growth in domestic cement consumption, we expect the industry growth to stand at 8-9% in fiscal 2011. This would postpone the recovery in the Ebidta/mt as the pricing power will take some more time to return to the industry.”

Sankhe adds, “Unless utilisation rates reach 90% these players would not be able to command any pricing pressure which would eventually put burden on their operating margins. At present the margins are down for the cement companies and the stocks are trading at 20% premium to their replacement costs, but if the utilisation rates reach 90% they will be able to command more premium.”

The current capacity utilisation rate is about 78%.

An analyst from an international brokerage says, “Increase in coal prices is a concern and the cement cartel is holding on the prices. It is surprising to see players being able to hold prices in Chennai and Hyderabad at Rs210 level.”

Another analyst from one of the top three brokerages said, “Even the 4-5 mtpa of exports are not happening due to oversupply and negligible construction in the Middle East. For the coming quarter we do not expect them to improve significantly.”