Sluggish demand impacts cement and realty sectors
Moneylife Digital Team 21 June 2011

The onset of the monsoon has led to decrease in demand from the construction industry, which has dampened the demand for cement. The hike in interest rates has also affected realty sales, which are already at unaffordable highs

The onset of the monsoon has led to decrease in demand from construction industries, which has dampened the demand for cement, thereby exerting pressure on the prices. While cement prices remain soft in the monsoon, the extent of the drop in rates obviously depends on the demand. This year, demand has been especially bad.

Yesterday (Slowdown spreading across all core sectors in India), Moneylife had pointed out that during FY2011, eight core industries-coal, crude oil, natural gas, petroleum & refinery products, fertilisers, steel, cement and electricity had registered a growth of 5.72% against 6.64% a year ago, mainly due to sluggish demand.

Energy-intensive manufacturing units have reported a dull performance. The rate hike announcement by the Reserve Bank of India (RBI) on 16th June may further dampen demand.

How will poor demand impact the cement and the realty sector?
According to data from Emkay Global Financial Services, March 2011 saw a peak in prices of cement bags—the average price of cement across India was Rs276/bag, up by 18% from the average price of Rs233/bag in December 2010. The prices have corrected since—the average price in May was Rs269/bag, a drop of 3%. Up to 11th June, prices have gone down further to Rs261/bag.

Analysts say there will be a further price correction due to the fall in demand and increase in production capacities. The sustainability of current prices depends upon the pick-up in construction activities.

"There are no major infrastructure projects announced by the government; many projects are awaiting clearance, so demand hasn't picked up. In March, the prices of cement bags were at their peak. Now prices have fallen by Rs10-Rs40 per bag and further correction is expected. Utilisation in southern regions has been falling, though the central and northern regions have maintained around 90% and around 75-80% utilisation." said an analyst from a leading broking firm, preferring anonymity.

According to the Emkay report, "The sector continues to be plagued by cost pressures (the recent news flows of sharp hike in regulated coal prices in Indonesia could further dent margins as fuel costs might increase further), which in turn would put severe pressure on profitability of manufacturers over the next 2-3 quarters."

The realty sector, a major consumer of cement, is experiencing a severe crunch as well. The exorbitant prices of real estate have put off buyers and the loss in revenues is leading developers to default on their loan repayments.

The hike in interest rates by the central bank could result in banks passing on the rate hike to customers and home loans could become more expensive. This would put off buyers even more, leading to a further slump in demand.

The Union ministry of housing has reported that by 2012, India will need 26.30 million houses- but 92,000 units remain unsold in Mumbai.

"Around 180 units sold in Mumbai from January to March 2011 were priced above an average capital value of Rs20,000/sq ft. No wonder the market is slowing down perceptibly now. Around 3,350 units priced at Rs20,000/sq ft and above remained unsold by the end of March 2011 in the city," Himadri Mayank, manager—research & real estate intelligence service, Jones Lang LaSalle India told Moneylife.

Many developers have fared badly, leading to a pile-up of unsold inventory. If this continues, it won't be long before developers resort to fire sales, leading to a crash in real estate prices.

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