‘Bad monsoon will cut cement demand by 3 million tonnes’

The domestic cement industry is staring at an oversupply situation this year while a looming drought is threatening to dampen infrastructure spend. H M Bangur, managing director, Shree Cement and President of Cement Manufacturers Association (CMA), spoke to DNA on the challenges and the road ahead for the sector. Excerpts from the interview:

This year the cement industry is expected to face maximum oversupply, how do you think things will pan out for the players?
Cement is cyclical in nature and we had a good run for so many years, but things cannot remain the same. It’s a 5-10 year cycle and right now we are at the peak of the cycle and may be for next 2-3 years we will see a surplus situation. In the last 2-3 years, the utilisation was 89-92%; it even went up to 98% for a year, now again capacity utilisation has to come down and marketing cement will be a challenge. Because of so much profit, so many new factories came up. If the government had restricted prices, capacity addition would not have taken place and the bull cycle would have been there for a much longer time. It is a healthy situation that new capacities are coming.

How will cement prices move going forward? Haven’t prices in the eastern region moved up considerably?
Price peak was in first week of June. From July, prices have been slipping in almost all the markets. A Rs 2-5 per bag slippage is there in most of the markets. Prices in the eastern region have risen more because the base price was low, but absolute price-wise Mumbai is still higher than Kolkata. Material from southern market has also started coming in the eastern zone so prices will correct very soon. Prices in the northern market will not go up, they have to come down. It’s a matter of time. Prices going up is not a fact and if we take a 5-, 10-, 15-, or 20-year average, the price of cement has maintained pace with the inflation. The ratio of inflation index to cement price index is 1:1.

Where is the demand pick-up more — infrastructure, rural, or the urban market?
The demand for housing has risen because of the free cash available with people. Need of housing is enormous. The loan waiver last year gave free cash flow to farmers. It is one year or so for that now and the demand has started to come in; rural housing has picked up very well in all over India. Secondly, infrastructure sector requires a lot of cement but because of the drought this year, part of the funds meant for infrastructure will go for drought relief and that much infrastructure will suffer.

Housing sector in class I cities, where the prices of land has dropped, remains the same. But in smaller cities, like say, Malda or Murshidabad, nobody is hit; housing industry there is doing very well. Small-time builders are very happy, it is the big-time builders who have a major problem.

This year Shree Cement will spend Rs 1,000 crore, have you tied up your finances?  What about your expansion plans?
It is already done, all the funds are tied up and there is no equity expansion we need to look at. Next year also we want to spend another Rs 1,500 crore, again most of it will be from internal generation only. Last year we produced roughly 7.7 million tonnes; this year we expect to produce between 9.5-9.7 million tonnes, and in the next year 11.5-12 million tonnes. So, this is the road map for our production.

What is happening on your power plant projects front?
We at present have 115 megawatt capacity. We are adding 145 mw by June next year. We are concentrating on strengthening our northern market position before looking at other areas. Right now, our hands are full with power projects, and next year after their completion we will look at new ideas when the economy will be stabilised.

You are actively into generating carbon credits, what is happening on that end?
We produce carbon credit worth 1 lakh tonne per year; this is very small but we are quite proud of it as we are the first in the world from the cement industry to get it.

Your business penetration is in the northern market, how is the demand there and is imported cement still an issue?
Commonwealth has given a big fillip to the Delhi market, and because of the metro so many flyovers are coming up. Delhi demand has almost doubled in the last three years.  The duty on imported cement is zero while there is 5% duty on petroleum coke, or gypsum, which is the input for cement. So, if the raw material has more duty than the finished product then that is a big problem and cement is coming from Pakistan. We have created enough capacity in north India as well as the South and we will be able to meet all the requirements in the country. Indian production will come down if the government encourages imports, so we think imports should not be there.

Shree Cement was looking at international presence what has been the progress on that front?
The international expansion is going absolutely slow. We have tried a few countries in South Africa in the southern and eastern part like South Africa, Mozambique, Nigeria, Zimbabwe. They are interested but bureaucracy there is worse than India. After two years of work, we feel little frustrated but we have not given up.

What are the challenges this year and how do you expect the industry to perform?
This year will be fine, with the cement industry reporting 11% growth in demand in the first quarter, overall for the year we expect 8-9% growth. Because of bad monsoon the demand will come down by three million tonnes. If the GDP growth comes down by 1% then 1.5% demand from the cement sector will also come down.

Investment bankers are expecting mergers and acquisitions to pick up in this sector, what is your view?
Yes, M&A should be definitely expected as the best times are over. Smaller players will definitely be taken over by stronger companies but as India is a growing market at present Shree Cement is not in the race to acquire anyone.