Indian Cement industry to face continued oversupply?

With more than 6 million tonnes of capacity addition in the pipeline in the next three years, the Indian cement industry could continue to remain under the surplus condition. As per the estimates, OCL India (Orissa) will increase its capacity by 0.7Mt by April 2005, Dalmia Cement (Tamil Nadu) by 1.4Mt by September and Shree Cement (Rajasthan) by one million tonne by the year-end. Meanwhile, Jaypee group’s 3Mt greenfield project will be commissioned by 2007 in Himachal Pradesh. There is likely to be around five per cent capacity addition per annum. The total production of cement hovers around 120Mta, although the installed capacity is nearly 160Mta. According to Ingres (a division of ICRA Ltd) study, the Indian cement market is oversupplied with an excess production capacity of over 20 per cent. The oversupply, it pointed out, is largely in the southern and western regions. 
 
 Northern and eastern regions, although still with a surplus, are relatively better off. The clubbing of northern region with the eastern region and the southern region with the western region is primarily because of the high amount of inter-regional movement of cement across the two regions. The silver lining, however, is that the surplus is likely to moderate in the near future. The Union Budget has given a thrust to infrastructure which will provide impetus to cement sector. The budgetary initiatives inlcude increasing the outlay for National Highway Development Programme and special focus on highway development in the North-Eastern region and high density highways not forming part of the golden quadrilateral.

The Bharat Nirman project will focus on six components of rural infrastructure including irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. There will also be focus on renewal and improvement of urban infrastructure for seven mega cities and all cities with population of over 100,000.

The study estimates that these initiatives should be able to increase the demand for the cement by around 7 to 8 per cent in the medium term. It also pointed out that the increasing consolidation of the cement sector will also have a positive bearing on cement prices which are likely to stabilise in a higher band. The study also warns that the cement companies would continue to face problems of rising manufacturing costs as they do not have control on the external cost elements such as energy and freight.