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Cement Growth Lags GDP Growth

It’s for the first time in the past several years that demand for cement (up by 5%) has grown at a slower pace than GDP (up by 8.5%). Demand for cement partially reflects growth in economic activity, particularly with regards to capex.

Demand for cement has been sluggish in the past one year. Cement demand grew by about 5% in 2010-11, against 10.4% recorded in FY10. The industry despatched 209 million tonnes in 2010-11 compared to 199 million tonnes in the previous year.

 

 

 

 

 

 

 

 

 

Consumption was particularly low in the Northern and Southern regions. Northern region because of completion of projects for the Commonwealth Games and southern region saw a sharp surge in capacity compared to the 3.4% fall in demand. Cement demand grew by 11.7% in the western region, by 10.3% in the eastern region.

It’s for the first time in the past several years that demand for cement (up by 5%) has grown at a slower pace than GDP (up by 8.5%). Demand for cement partially reflects growth in economic activity, particularly with regards to capex. The probable reason for the same are: 

  • Slower capex is reflected by a weak growth of 7.1% in gross fixed capital formation in 2010-11 compared to 14.6% in the previous year.
  • Hardening interest rates. This resulted in costlier funds for expansion purposes.
  • Higher growth in agriculture of 6.6% vis-à-vis industrial growth could have been be a reason for cement demand lagging the GDP growth demand.
  • Slower growth in demand from the housing and construction sector.

The demand for cement in the first two months of the current financial year also appears to be weak. With normal rainfall expected during the monsoons, when construction activity comes to a virtual standstill, demand for cement is expected to remain weak until the end of the season.

It must be noted that price of cement has risen over the past few months only because the companies passed on the increase in cost to the end consumers. It was not due to rising demand scenario. In fact, a surge in cement capacity resulted in an oversupply situation due to which cement manufacturers could not pass on the entire increase in cost and had to take a hit on their margins.

Cement companies are increasingly finding it a challenge to sustain the high operating profit margins that the industry once garnered. During the June 2011 quarter, cement prices are expected to remain subdued due to poor growth in demand and the inability of companies to pass on the higher cost in freight, gypsum and fuel to the customers.

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Categories: Cement
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