Last month was a bleak one for the cement industry in India as statistics from the Ministry of Commerce & Industry showed that cement production had dropped year-on-year every month since December 2016. As if the statistics were not bad enough, the credit rating agency, ICRA, has further lowered its forecast for the cement demand growth to less than 5% for the 2017-2018 fiscal year.
According to the data from the Ministry of Commerce & Industry, cement production peaked in the 2015-2016 fiscal year. Things took a downward spiral when in November 2016, the government introduced a demonetization policy. Cement production went negative in December 2016 and had sadly remained so since then. While the government was mostly responsible for the drop in cement production, production figures had troughed sometime in February 2017 before dropping further and stayed so afterwards.
According to the Reserve Bank of India annual report of August 2107, the policy failed in its primary aim of reducing the corruption that a cash-dependent economy could hide such as tax evasions. People were able to circumvent the bank deposit limits and successfully laundered huge sums of money without ever been caught. According to analysts from Financial Times, the long-term consequences of pushing the economy towards of e-payments and increasing the tax regime could be to the advantage of all.
Furthermore, the CMA had fingered production overcapacity as the reason for the sorry state of things. CMA had however made light of the overcapacity problem plaguing the cement industry in India, as UltaTech had revealed (using data from the Department of Industrial Policy and Promotion). The overcapacity is expected to grow to a projected figure of 157Mt in the next financial year, though the rate of utilization is expected to rise slightly.
UltraTech’s Cement’s figures forecasted that the utilization rates would not exceed 70% until around 2020-2021 fiscal year. According to an analyst from the Mint Business Newspaper, they had predicted that the rate would rise sooner, at about 2019-2020. Last year while the CMA lamented the excess capacity in the industry, it hopes was on that the infrastructure schemes such as the Mumbai-Ahmedabad bullet train. But an official from JK Cement are not very optimistic; according to the official one train line won’t make any significant difference.
That’s why the ICRA and several other credit growth forecast for cement demand are very critical. It is because they indicate how soon India may be able to bridge the gap between demand and production capacity. Sadly, the demonetization policy frustrated the ICRA’s predictions for the 2016-2017 financial year. It had forecast a rise of about 6%, but it fell by 1.2%! So reducing its forecast for 2017-2018 with concerns about weather and the implantation of the Goods and Services Tax (GST) in the second part of the year, is most probable. Major cement manufacturers like Ambuja and UltraTech based on the recovery plans on 6%+ growth. Anything lower than this, and the gap remains.