A cement glut may flood the market

An analysis of the monthly dispatch figures and the newly-commissioned capacities indicates a clear annual over-capacity of a minimum of 36.27MT in the demand-supply situation

Over the past few months, the cement industry has been enjoying an upward momentum in cement prices due to the peak demand period. However, an analysis of the monthly dispatches and the new capacities commissioned paint a gloomy picture for the months to come.

According to Cement Manufacturers’ Association data, total installed cement capacity in India was around 219.17 million tonnes (MT) as on 31 March 2009. During FY2010, around 35MT of new cement capacity has been added. Thus, total commissioned cement capacity has gone up to around 254.17MT.

Total cement dispatches for January 2010 stood at around 18.15MT. Given that dispatches in January 2010 were one of the highest-ever recorded monthly figures, yearly dispatches can be calculated at a projected figure of 217. 89MT.

Thus, comparing a total commissioned capacity of around 254.17MT with a yearly dispatch of around 217.89MT, an annual over-capacity of around 36.27MT is expected in the demand-supply situation.

However, 36.27MT could be the least possible annual over-capacity figure, as January 2010 has been taken as the base. Again, recently-added capacities are likely to run on full steam in the months to come. In addition, analysts expect cement demand to decline in the future.

The onset of the monsoon season from June is likely to slow down construction activities, resulting in lower cement demand, much lower than the figures for January 2010. In addition, demand created due to construction activities for the New Delhi Commonwealth Games will start petering out by July 2010. This will impact the northern region in particular, pointed out an analyst.

Among the companies that have commissioned new cement capacities over the past one year are Madras Cements, Chettinad Cements, Grasim Industries, Jaypee Cement, UltraTech Cement, Dalmia Cement, India Cements, JK Lakshmi Cements, and Kesoram Industries.

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    1 decade ago

    Good article. Further analyis on capacity utilization levels in industry as well as inventory (channel and company) would help

    ‘Consumption patterns are changing rapidly’

    DV Ram Kumar, vice president-Food & Agri, Spencer’s Retail Ltd, spoke with Moneylife on the issues facing the food retail business and his company’s growth plans

    Pallabika Ganguly (ML): Is inflation going to rise in the coming months?
    DV Ram Kumar (DV):
    Since the past four to five months, inflation has been settling down. But it is a fact that inflation is going to remain. This is not only due to the mismatch in the supply-demand scenario, but also due to the rapid change in the consumption pattern of consumers. The consumption pattern is changing rapidly in India—particularly in rural areas and Tier II & Tier III cities.

    ML: What kind of changes do you see in food consumption patterns?
    Customers are upgrading very rapidly. We are noticing changes in eating patterns in every three to six months. People are getting more exposed (to various foods) and their awareness levels are changing. Aspiration levels and consumption habits are changing. Consumers are looking for fast food (like pizzas and burgers) and also for healthy products (with less cooking oil). As an industry, if we do not prepare for such kind of changes, we will suddenly have to find a way to meet the new requirements of customers. In the next four years, we will have to face a different set of customers with different needs. We are on our toes to understand these changes, introduce new products and keep up with customers.

    ML: Is poor infrastructure leading to wastage?
    Productivity and wastage are the two major issues in the fast moving consumer goods (FMCG) segment. There is huge wastage in dry commodities as well as fresh products. This is mainly due to lack of infrastructure. Products like wheat and pulses are rotting despite the money invested in logistics. There is a lack of warehouses and cold chains in the country. Distribution is not happening in an equitable way. That is why some areas in India have a surplus and the others suffer a shortage. 

    We need to address this factor. Annual wastage in perishable goods is almost 38%-40% and in dry commodities at least 21% gets wasted annually due to lack of storage (facilities).

    ML: India is facing an acute water-shortage problem. What will be its impact on the FMCG sector?
    We need sustainable agriculture. We must soon get into drip irrigation and adopt other kinds of technologies for agriculture which use minimal water. Drip irrigation has been around for a long time, but the utilisation of the technology has been minimal. Equipment (for drip irrigation) is available only in a few pockets in Maharashtra and Punjab, and equipment costs have to come down.

    We as corporate houses have a big role to play in spreading awareness about such technologies. We have to take steps to educate farmers, explain to them the benefits of the technology and also spread awareness that using these technologies will boost production. {break}

    ML: How did Spencer’s perform during this financial year?
    The FMCG sector went through some stress during the slowdown. But going forward, we foresee good growth in this sector. At Spencer’s, we have done a lot of innovation, particularly in value engineering. We worked on inefficiencies to cut down costs. We vigorously optimised freight costs, tightened operational expenses, cut down on rents and power bills (our Mumbai stores shifted from Reliance Infrastructure Ltd to Tata Power), we closed down a few distribution centres and unnecessary warehouses. Overall , we reduced inefficiencies by 8% to 10%.

    We closely looked at our efficiency parameters—this helped us to produce decent results. This is not a one-time job. We need to be on our toes to keep a tight grip on inefficiencies. Now consumption is coming back. On a month-on-month bases, we are seeing 6%-7% increase in consumption. We hope to see double-digit growth in same-store sales growth.

    ML: The Union Budget has proposed 10% service tax on rented properties. How much will this proposal affect retailers?
    It is a challenge. We need to represent our views and find a way to get relief on the same; in the current scenario, the industry is not ready to take this kind of enhancement (in taxes). (The service tax of) 10% is a big number, because in the first place, we are struggling to meet revenue targets versus our expenses.

    ML: Can you elaborate on your expansion plans?
    We are looking at expansion, but I cannot give you a number. Expansion will happen responsibly. We are situated across India—Delhi, Bengaluru, Chennai, Hyderabad and Kolkata. We are going to add more stores in these places. We are not looking at opening standalone stores in new places.

    We are also planning to add more exclusive standalone non-vegetarian food item stores (under the brand) Spencer’s Fish & Meat. We are (still) at the pilot stage. We have launched three standalone stores in Kolkata. It is a complex category which needs proper back-end facilities. We will expand these stores to other cities where we are already present. We are looking at opening such stores in Bengaluru, Chennai and Hyderabad.

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    Sector performance: March quarter gainers and losers

    We bring you an analysis of the major sectoral leaders and laggards for the March quarter

    The Sensex has only marginally risen from its December quarter closing (17,465) to end up at 17,528 for the March quarter. However, for the past few weeks, the index has been chugging ahead at a fast pace. Some sectors were at the forefront of this rally while others have missed it altogether.

    19 out of the 29 Moneylife sectoral indices have ended the March quarter in positive territory. Leading the pack is the cement sector, which has surged 17% over the December quarter closing. The acceleration in construction and infrastructure-related activity has resulted in strong demand for cement products.

    Cement prices have shot up, giving a fillip to the top-lines of cement companies.
    The consumer durables sector has also witnessed a sharp rally, rising 14% over this period. Higher disposable incomes through payment of arrears of the Sixth Pay Commission and NREGA payouts have boosted demand for consumer durables even in the rural sector.

    Farm & farm inputs and non-ferrous metals indices have risen 12% each. In order to improve farmers’ conditions, agricultural inputs were relieved of the tax burden in the recent Budget.

    Rounding up the top five is the auto components sector index, which rose 9% during this period. Automobile companies witnessed a spike in sales of passenger cars and two-wheelers that hugely benefited component manufacturers.

    Among the laggards, the sugar index has witnessed a dramatic turnaround from last year’s rally, falling 24% over the past three months. A crash in sugar prices has spelt trouble for sugar companies. Many investors who bought sugar stocks near the peak of its record surge may be left licking their wounds.

    The real-estate sector index has lost 13% of its value while the steel index has also tanked 8%. While property prices have slowly inched upwards, demand has not yet shown strength. With interest rates set to rise, the situation may turn worse. Steel manufacturers have had to contend with margin pressures following a surge in prices of iron ore, the main raw material in steel production.

    Energy and oil & gas sector indices have also taken a beating, falling 6% and 4% respectively over this period.

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