Covid-19 effect sees cement demand to take a hit, recovery likely from H2 FY2021 post the monsoons: ICRA
- With the lockdown in place, the demand off-take has effectively ceased; most companies have either shut down manufacturing operations or are likely to be shut down shortly
- Most of the major cement companies have adequate liquidity to tide over the next quarter
Domestic cement demand is likely to get adversely impacted owing to the lockdown on account of covid-19 pandemic. While production as well as off-take is likely to be practically nil during the lockdown period, even post removal of lockdown, there may be impact on demand revival because of factors such as reduced income levels resulting in demand compression; and possibility of slower demand from affected offtakers such as construction and real estate development sectors. Thus, demand recovery is likely only in H2 FY2021 post the monsoons. However, ICRA notes that most operational expenses of cement players are variable in nature- thus, most major cement companies, especially those which have modest gearing and repayment and healthy liquidity are likely to be able to tide over the short-term.
Giving more insights, Ms. Anupama Reddy, Assistant Vice President, ICRA Ratings, says,“The cement demand showed some improvement in November 2019 – January 2020, however, the adverse impact of covid-19 has ticked in March 2020 and is likely to continue in Q1 FY2021. With the lockdown in place, the demand offtake has effectively ceased. Most of the companies have shut down manufacturing operations and the rest are likely to be shut down shortly. Beyond the immediate near term, impact could be there on off-take due to domestic demand compression arising out of loss of income of prospective consumers. The demand is likely to recover in H2 FY2021 post the monsoon season.”
In 10M FY2020, the cement production reported an increase of a modest 1.1% Y-o-Y at 278.8 million MT. The demand growth was impacted owing to a slowdown in project execution due to – the general elections and labour unavailability (in Q1 FY2020), monsoons (in Q2 FY2020) and weak execution of government housing and infrastructure projects because of extended monsoons (in Q3 FY2020). In Q3 FY2020, south India faced muted demand momentum particularly in Andhra Pradesh/Telangana, while demand was moderate in other southern states. In the north and central India also, the demand was modest owing to construction ban in certain areas, harsh winters etc. However, the western India saw moderate uptick in demand trends, driven by infrastructure development and rural spend. In east, the demand picked up substantially towards the end of the quarter, driven by government spending on infrastructure and affordable housing segments.
At the pan-India level, cement prices are higher in the northern, southern and western markets by 20-25%, 5% and by 8% respectively in 11M FY2020 on Y-o-Y basis. However, the prices are lower in the eastern markets by 2%-3% during the same period. The slowdown in the demand is likely to exert pressure on the cement prices in the near term. The easing of cost-side pressures such as a decline in the pet coke prices by 23% Y-o-Y and coal prices by 25% Y-o-Y in 11M FY2020 has supported the decline in the power & fuel costs for the cement companies in the current fiscal year. In addition, there has been some moderation in the diesel prices by around 3.3% Y-o-Y in 11M FY2020.
Adds Ms. Anupama,“With discontinuance of operations, the only expenses left would be manpower and debt servicing expenses and a minimal amount of factory overheads. However, most of the major cement companies have adequate liquidity and are likely to tide over the lockdown period.”
