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Real Estate Slowdown Hits Cement Industry
The slowdown in real estate sector (residential and commercial), which accounts for about 65 per cent of the total cement consumption in India, affected the cement sector. Since most builders are facing a severe cash crunch, it is unlikely that too much real estate development will take place in the near future. The IT/ITES segments account for three-fourth of the office space across India and lower growth in employee recruitment for the sector shall translate into muted demand for cement.
Cement exports, too, have declined from 10 million tonne (mt) in FY05 to 2.1 mt between April-December 2008 on account of additional capacity addition and real estate slump in the Middle East region, which is the main export market of Indian cement producers. Demand for cement can be gauged from the country’s economic performance, with demand typically averaging 1.2 times the GDP growth. Assuming that India’s GDP will grow at 6.5 per cent and 6 per cent in FY09 and FY10 respectively, analysts expect demand for cement to grow at 7.8 per cent and 7.2 per cent in the mentioned two years, respectively. Additional capacity to the tune of 90-95 mt is expected to be added by the end of FY11. This would result in a surplus of about 10 mt and 35 mt in FY09 and FY10, respectively. “We believe with over capacity scenario inevitable and demand slowing down on account of real estate slump, further price cuts will happen post FY09,” feels Mihir Jhaveri, analyst, Religare Hichens & Co. All India average cement prices during December 2008 declined to Rs 234 per 50 kg bag (Rs 238 in November 2008). Analysts have factored a marginal decline in realisations during Q4 FY09, followed by a 5-10 per cent decline in prices during FY10.
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