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Cement sector hopes to keep despatch momentum going

Business Standard:  June 04, 2009

Mumbai: Having clocked the highest growth in dispatches in five years, during April, the cement industry is hoping to sustain the growth momentum in the months ahead.

The optimism stems from the fact that the growth in dispatches during the last few months was on account of a higher demand from the eastern states of Bihar, Jharkhand and Orissa, and eastern Uttar Pradesh.

In addition to this, the demand emanated from the tier II and tier III cities and rural areas, industry analysts said. The other source of demand was infrastructure projects that took off before the Lok Sabha elections.

With the government making its intent to restart highway construction and signs of higher demand from the real estate sector, the cement manufacturers expect demand to come from across the country. According to government estimates, infrastructure projects worth nearly Rs 46,000 crore, many of which were held up due to the elections, are expected to be awarded in the coming months.

“This year, 8 per cent growth rate in cement sector is guaranteed. The new government’s focus on infrastructure will boost demand for cement,” said Ambuja Cements managing director Amrit Lal Kapur.

“Now there is clarity and we foresee a good demand for cement. Demand from rural areas and infrastructure projects will continue. Situation in urban region is also likely to sustain,” said a cement analyst at a domestic brokerage firm.

During 2008-09, dispatches had risen 7.94 to 181.01 million tonnes, while production was 7.79 per cent higher at 181.42 million tonnes.

Since November, dispatches have consistently grown by over 8 per cent.

In April, the 218-million-tonne industry witnessed a growth of over 13 per cent. And, in May, according to the numbers available with the top manufacturers, the growth momentum has continued.

For instance, last month, Ambuja Cements’ dispatches grew 9 per cent, while the Aditya Birla group saw 20 per cent more cement bags move out of its factories. Similarly, northern majors JP Associates and Shree Cement came up with much better numbers, at 26 per cent and 32 per cent, respectively.

While a revival of demand is good news for the industry, which has often been accused of over-charging when the times are good, the excess capacity of around 40 million tones is expected to keep prices stable. Another 50 million tonnes capacity addition is expected to take place during the present financial year.

Between 2005 and 2008, cement companies saw a significant increase in profits due to improvements in realisation and better efficiencies at the plants. Since 2005, the average price of a 50-kg cement bag has risen over 55 per cent from Rs 160 to Rs 250 a bag, partly due to higher input costs.

“Since there will not be any further rise in cement prices, volumes will be the key to push up the growth rate. Profits generated from the volume growth will be able to help the industry to some extent and absolute profits can be maintained,” said Cement Manufacturers’ Association President Hari Mohan Bangur.

“Prices are already on a higher side and possibility of further hike is unlikely. Though correction is expected, it will not be that deep as was expected earlier,” said a Mumbai-based analyst tracking cement sector.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.