Cement demand likely to shrink by up to 25% in FY21 due to lockdown: Icra
While rural housing and infrastructure projects in remote areas would support cement consumption, urban-led demand is headed for a slowdown
Cement demand is likely to de-grow by up to 25% this fiscal on account of the coronavirus lockdown and subsequent specific restrictions disrupting construction activities, ratings agency Icra said.
It further said cement manufactures may witness a compression in operating profitability by 150-200 basis points (bps) in the current financial year.
While rural housing and infrastructure projects in remote areas would support cement consumption, urban-led demand is headed for a slowdown, it said.
"ICRA expects cement demand to de-grow by 22-25% in FY2021 given the prolonged nationwide lockdown and subsequent state/city specific restrictions disrupting construction activities," the credit rating firm said in its quarterly update on the sector.
However, it added that despite the expected decline in demand, cement prices are likely to remain stable or get only marginally corrected.
"This along with our expectations of benign power and fuel costs is likely to result in relatively modest compression in operating profitability by around 150-200 bps only in FY2021," it said.
According to Icra Ratings assistant VP Anupama Reddy, demand offtake effectively dried up during the lockdown period of close to 40 days.
"With the lockdown being extended with varying forms and severities across different regions, the demand has seen a sharp correction in Q1 FY2021. The demand is likely to recover only from H2 FY2021 post monsoons," she said.
As per estimates, housing, including the low-cost and affordable housing segment, accounts for around 65-70% of the cement demand, followed by infrastructure at 20-23% and rest by commercial and industrial capex.
"While rural housing is likely to drive the demand in the current fiscal, the urban housing, infrastructure and commercial and industrial capex are likely to take a back seat," it said.
The residential real estate sector, which has already been under stress for a prolonged period due to weak affordability, subdued demand conditions, a high inventory overhang and more recently, a liquidity crisis, has been further impacted by the pandemic.
"The risks are only likely to increase, resulting in a substantial decline in new sales. The new launches are likely to get deferred, not only due to operating issues (construction and labour related), but also due to increasing economic uncertainties, resultant subdued demand and likely moderation in developer inflows," it said.
According to the Cement Manufacturers Association (CMA), the total installed capacity in the Indian cement sector is approximately 545 million tonnes per annum, whereas 337 million tonnes was produced in 2018-19, signifying a capacity utilisation of around 62%.