Over the past year, the infrastructure sector has started seeing a small turnaround after dismal growth in the past two to three years. This, in turn, has impacted the market for key materials such as cement, steel and bitumen. The demand-supply wedge has continuously impacted the price of these crucial inputs. Nonetheless, the medium-term outlook for the materials sector is bright. However, the near-term outlook continues to look challenging. In the short run, demand is expected to remain subdued until project execution activity across segments gains steam.
Indian Infrastructure provides an update on the market for key construction materials…
India is the second largest producer as well as consumer of cement in the world. The demand for cement is mainly derived from infrastructure and housing. These two sectors together account for around 80 per cent of total cement consumption. The demand for cement was affected by an overall economic slowdown in recent years, which resulted in low construction activity. During 2014-15, India’s cement production capacity stood at 350 million tonnes (mt). The industry has added more than commensurate capacity in the past few years in anticipation of rising demand from the infrastructure and real estate sectors. However, the growth rate in capacity addition saw a fall between 2010-11 and 2013-14. In 2014-15, capacity growth increased for the first time in five years. The industry’s capacity utilisation rate in 2014-15 averaged around 70 per cent.
The cement sector has been struggling with the supply overhang. The industry produced 270 mt of cement in 2014-15, registering a growth of 5.6 per cent over the previous year. In the past few years, cement production remained weak due to lower demand from end-user industries and delays in securing environmental clearances for industrial and infrastructure capacity addition projects. On the consumption side, India’s cement consumption increased to 262 mt in 2014-15, witnessing year-on-year growth of 5.3 per cent over 2013-14. For the first time since 2010-11, consumption and production grew at the same rate in 2014-15.
During 2010-11 to 2014-15, cement prices exhibited an upward trend. The increase was more pronounced during 2012-13. The wholesale price index (WPI) for cement increased to 169.6 in 2014-15, witnessing a year-on-year growth of 1.57 per cent. The surge in the prices has been mainly to cover the production costs as volumes have not been commensurately supportive. Besides, an increase in input and logistics costs continued to exert an upward pressure on cement prices.
In the Railway Budget 2015-16, the freight rate for cement was hiked by Rs 21 per tonne (that is, 2.7 per cent) to Rs 805.60 per tonne. Freight rates of coal and slag, used in the making of cement, were also increased by Rs 45.70 per tonne and Rs 20.90 per tonne, respectively. Moreover, the sliding rupee, which led to a surging import bill for key inputs used in cement production, such as pet coke and gypsum also contributed to the hike in prices.
Due to the factors mentioned above, the financials of cement companies have been under stress. Cement companies put up a subdued performance in 2014-15 as well as in the first quarter of 2015-16. According to the Reserve Bank of India, the cement sector carries the second highest debt burden in India. As of March 2015, there were seven corporate debt restructuring (CDR) cases in the cement industry, involving a total debt of about Rs 29 billion.
The installed capacity for steel production in India stood at 109.9 mt in 2014-15, recording a year-on-year growth of 10.3 per cent. The capacity grew at a compound annual growth rate (CAGR) of 8.12 per cent during 2010-11 to 2014-15. Steel capacity, however, has been higher than demand, resulting in low capacity utilisation. A ban on iron ore mining led to a fall in capacity utilisation between 2011 and 2014. After the reopening of iron ore mines in Goa and Odisha during 2014-15, capacity utilisation increased for the first time since 2010-11.
In 2014-15, India’s steel production and consumption stood at 91 mt and 77 mt respectively. In the past five years, production growth has witnessed a downward trend with the lowest growth recorded in 2014-15. Subdued demand from the construction and automobile sectors as well as the unavailability of iron ore with the ban on mining activities in Karnataka, Goa and Odisha were the reasons for this decline.
Growth in consumption was also sluggish between 2010-11 and 2013-14 due to slow industrial growth and dismal project execution. However, steel consumption increased substantially in 2014-15 primarily because of the increasing thrust on infrastructure development and rising automobile sales.
In the past five years, the supply of steel in India has been greater than the demand and yet India has largely remained a net importer of steel (except in 2013-14). In fact, in 2014-15, imports increased by over 71 per cent (to 9.32 mt), primarily due to a sharper fall in international steel prices in contrast to the domestic prices.
Domestic steel prices have exhibited a rising trend, unlike global steel prices, which have fallen. In absolute terms, though domestic steel prices rose in 2014-15, the increase in royalty prices and railway freight rates could not be passed on by steel producers completely due to the availability of cheap imports, falling global steel prices and persistent domestic overcapacity. Financially, steel producers are facing challenging times. This is reflected in shrinking profit margins and burgeoning losses for several players. As of March 2015, the industry accounts for almost 20 per cent of the total debt under CDR cases.
Going forward, it is expected that demand for steel will surge only with a revival in economic activity. According to the World Steel Association (WSA), India is expected to be one of the fastest growing markets in steel use in 2016. The WSA projects Indian steel demand to grow by 7.3 per cent in 2016, as compared to global steel use growth of 1.4 per cent.
Bitumen is a by-product of the fractional distillation process of crude oil, and is mainly used in the construction of roads. Between 2010-11 and 2014-15, while India’s bitumen consumption grew at a CAGR of 2.67 per cent, production grew at about 1.09 per cent. The domestic production of bitumen has been in the range of 4.5 mt to 4.8 mt since the last few years. Bitumen is considered a low-value product and most refineries focus on high-value products. The bitumen consumption growth rate fell drastically in 2014-15 to 1.1 per cent as compared to 4.67 per cent in 2012-13. Nearly 90 per cent of the bitumen produced annually is utilised in the road sector, and another 10 per cent in waterproofing.
Since India’s consumption of bitumen is currently in excess of production, the gap is met by imports. In 2014-15, bitumen imports rose drastically by over 95 per cent to about 450,000 tonnes. The wholesale price of bitumen increased at a CAGR of 10.41 per cent between 2010-11 and 2014-15. The government’s decision to use cement instead of bitumen for road construction will most likely impact bitumen consumption. The Ministry of Road Transport and Highways has launched an online marketplace for expeditious cement procurement at affordable prices. Nonetheless, industry experts believe that due to technical difficulties and because of the high degree of expertise required to build concrete roads, along with rising cement prices, in the short run, bitumen demand is not expected to fall even in the national highway segment. In addition, state highways, roads in hilly regions, as well as rural roads will continue to fuel the demand for bitumen.
Over the past year, the construction materials industry has been affected by cost-side pressures, the sliding rupee, overcapacity and subdued demand. Given the government’s thrust on reviving stalled projects and the initiation of several new big-ticket programmes such as the Smart Cities Mission and Bharat Mala, it is expected that the momentum for infrastructure growth will pick up. While corporate confidence has improved, it is yet to translate into activity on the ground. Given the time lag between announcements and implementation, any recovery in the materials market is likely to take place with a lag, perhaps only from end-2016.