Budget push crucial to boost cement demand

30 January 2017

The Government’s renewed focus on infrastructure spending should give a major fillip to the cement sector which bore the brunt of high-value currency demonetisation.

Low demand from construction and real estate sectors has hit cement companies hard. The Government’s higher allocation in the Budget for its pet project ‘Housing for all’ will boost cement consumption and help companies improve their capacity utilisation which has plunged to a new low after the note ban.

Capacity utilisation

Cement companies that have put up fresh capacity in anticipation of robust economic growth are in fix. The pace of economic growth has not lived up to the expectations and most of the companies are operating much below their optimal capacity.

This apart, the interest outgo and provision made for depreciation has started hitting their profitability. In fact, the all India cement industry capacity utilisation in the December quarter dipped to 60 per cent after demonetisation in November.

Fall in prices

Prices across regions have fallen due to weak demand. The operational cost has been rising with the recent increase in coal prices and freight charges. The upward revision in petrol and diesel has added to cement companies’ woes.

A reduction in royalty paid on limestone and gypsum mining in the Budget will go a long way in bring down the operational cost. The demonetisation came when most companies were waiting for a revival in private sector spending.

While not expecting any sector-specific sops, cement companies expect Government to increase public sector spending and provide incentives to encourage private sector companies take up new projects. This will not only revive investment cycle but also increase demand.

A rise in Budgetary allocation towards infrastructure sectors would bring down logistics cost for manufacturing companies.

An independent regulator for each infrastructure sub-sectors would help in timely implementation of projects and avoid cost overrun. An early and efficient dispute resolution mechanism in the infrastructure sector could unlock huge capital.

Dedicated fund allocations for specified large infrastructure projects announced in last Budget such as bullet trains, Bharat Mala, Sagar Mala, Smart Cities, inland waterways development should also boost cement demand.

On the capacity creation front, the Budget may offer some sops for builders constructing affordable houses in rural areas. Industry estimates a shortage of 6 crore housing units in the affordable segment till 2022.

Source – BS