India’s demand for cement is expected to rise to 6 percent in the current financial year against 4.6 percent in 2015-16, ratings agency ICRA has said.
This (demand) is expected to support the cement prices in the near term. However, the energy cost benefits are expected to reverse in second half of 2016-17, given the recent hike in the pet coke and coal prices, it said in a statement today.
ICRA Ratings Senior VP Sabyasachi Majumdar said demand in 2016-17 is likely to be mainly driven by the pick-up in the infrastructure segment, primarily road projects and housing segment and the likelihood of a recovery in the rural demand from second half of this fiscal, given the better monsoons.
“This is likely to support cement prices in near term. Notwithstanding the improved sentiments in these sectors, a number of structural constraints need to be sorted out for project implementation to gather pace in the other infra sub segments,” he added.
Government’s emphasis on the infrastructure projects is likely to result in increased public sector investments, revival of the public private partnership (PPP) is critical to improve the pace of infrastructure development, he said.
While, the energy cost savings supported profitability of the cement manufacturers during Q4 2015-16 and Q1 2016-17, the benefits of the same are likely to get diluted going forward, given the recent increase in the coal and pet coke prices, Majumdar added.
Despite a decline in the energy cost savings during Q2 2016-17, North Indian cement manufacturers would report better profit numbers for H1 2016-17 vis-a-vis H1 2015-16 supported by the significant increase in cement prices.
Pet coke prices have been increasing since February 2016 and reached to around Rs 6,400 pet tonne in August 2016, an increase of around 78 per cent when compared to the low of January 2016, ICRA said.
This has been due to the higher domestic demand for the product, coupled with the supply constraints. Pet coke prices during July-August 2016 have been higher by 8 per cent when compared to the corresponding period last year, giving rise to the likelihood of dilution in cost savings, it added.
Further, coal prices, which declined during 2015-16, witnessed some recovery during May-July 2016. In July 2016, coal prices were higher by 12.5 per cent as against the price in July 2015 The recovery in coal prices can be primarily attributed to supply side cuts and improved demand from China.
Also, during April-August 2016, there was a nearly 15 per cent increase in diesel prices when compared to Q4 2015-16 and around 6 per cent when compared to April-August 2015 trends.
This is likely to put pressure on the freight costs for cement companies during 2016-17, Majumdar said.