The previous fiscal year (2015-16) saw a slight turnaround in the infrastructure sector after registering dismal growth from 2012-13 to 2014-15. This poor growth, in turn, impacted the market for key materials such as cement, steel, bitumen and geosynthetics leading to a drop in demand. The demand-supply gap resulted in a fall in prices of these crucial inputs. Nonetheless, the medium-term outlook for the materials segment is bright and demand is expected to be fuelled by factors such as the government’s increasing thrust on infrastructure, the launch of several big-ticket programmes and rapid urbanisation in the country.
Indian Infrastructure provides an update on the market for key construction materials…
India is the second largest producer and consumer of cement in the world. Most of the demand for cement comes from the housing and infrastructure sectors. The two sectors account for about 80 per cent of the total consumption, with housing being the key demand driver. Other key consuming sectors are commercial, institutional and industrial buildings.
At present, the cement industry is suffering from a demand-supply imbalance, with significant excess supply. The industry witnessed weak demand during the past few years due to the slow pace of project execution in the infrastructure sector as well as muted demand from the real estate sector.
Production capacity: The total installed capacity of cement production in the country stood at 405 million tonnes (mt) in 2015-16. Between 2011-12 and 2015-16, cement capacity grew at a compound annual growth rate (CAGR) of 4.7 per cent. The capacity utilisation rate of the industry stood at 71 per cent. The higher than commensurate capacity additions by producers, in anticipation of higher demand, led to low capacity utilisation levels. Region-wise, south and north India account for more than 70 per cent of the total installed capacity. The sector has high regional disparity in terms of capacity utilisation rates which are as high as 85 per cent in the eastern region and only 55 per cent in the southern region .
Production and consumption: The industry produced 289 mt of cement in 2015-16, registering a growth of 6.7 per cent over the previous year. In the past few years, cement production has 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 267 mt in 2015-16, witnessing a year-on-year (YoY) growth of 3.3 per cent over 2014-15. The demand for cement was affected by the overall economic slowdown in recent years which resulted in low construction activity.
Exports: India was largely a net exporter of cement from 2011-12 to 2015-16. Cement exports and imports, in terms of value, stood at Rs 15.7 billion and Rs 6.1 billion respectively during 2015-16. A country-wise analysis shows that more than 80 per cent of the cement exports are for Sri Lanka and Nepal.
Prices: From 2011-12 to 2015-16, cement prices exhibited an upward trend. The increase was more pronounced during 2012-13 and 2015-16. The wholesale price index (WPI) for cement increased to 173.6 in 2015-16, witnessing a YoY growth of 1.57 per cent. The surge in prices has been mainly to cover production costs as the volume of sales has not kept pace. Besides, an increase in input and logistics costs continued to exert an upward pressure on cement prices.
As a result of these factors, the financials of cement companies have been under stress. According to the Reserve Bank of India, the cement sector is the second most debt-ridden sector in the country. As of March 2016, there were seven corporate debt restructuring (CDR) cases in the cement industry, involving a total debt of about Rs 28.94 billion. However, demand is expected to pick up given the government’s focus on reviving infrastructure sectors and the likelihood of a recovery in rural demand given the expectations of a better monsoon.
India became the third largest producer of crude steel in 2015, as against being the eighth in 2003. Demand for steel is driven mainly by the construction, infrastructure and automobile sectors. These three sectors account for two-thirds of the total steel consumption. While long steel products are generally consumed by the construction and infrastructure sectors, flat products are used in the consumer durables and industrial machinery segments. Products such as hot-rolled galvanised steel and plates are used in the construction industry for building civil structures, bridges, dams, highways, telecom towers, power plants, and mega residential and non-residential complexes.
Production capacity: The total installed capacity of steel production stood at 118.2 mt in 2015-16, recording a YoY growth of 7.6 per cent. During the five-year period 2011-12 to 2015-16, steel production capacity grew at a CAGR of 6.8 per cent. The capacity addition, however, was higher than the offtake of the metal, resulting in capacity underutilisation. During 2015-16, the capacity utilisation rate fell below 80 per cent from a high of about 88 per cent during 2010-11. This drop was on account of a ban on iron ore mining in a number of states. In 2014-15, capacity utilisation improved with the reopening of the iron ore mines in Goa and Odisha.
Production and consumption: In 2015-16, India’s steel production and consumption stood at 90.4 mt and 80.5 mt respectively. In the past five years, production growth has witnessed a downward trend with the YoY growth rate becoming negative in 2015-16. During 2011-12 to 2013-14, consumption growth was sluggish due to slow industrial growth and dismal project execution in the infrastructure space. However, the growth rate increased substantially in 2014-15 primarily on account of the thrust on infrastructure development by the government.
Imports: In the past five years, the supply of steel has been greater than the demand and yet India has largely remained a net importer (except in 2013-14). In fact, in 2014-15, imports increased by over 71 per cent (to 9.32 mt), primarily due to a sharp fall in international steel prices relative to domestic prices. A country-wise analysis shows that China was the biggest exporter of steel to India during 2015-16, while India has been exporting steel to countries such as Italy, Iran, the UAE, the US and Belgium.
Prices: During the period 2014 to 2016, domestic steel prices exhibited a declining trend largely due to falling iron ore prices and pressure from depressed steel prices globally. Iron ore prices showed a drastic fall during 2015-16, due to partial reopening of the iron ore mines in Goa, Karnataka and Odisha. However, steel prices increased in April 2016 compared to prices prevailing in March 2016, post the imposition of minimum import prices (MIPs) in February 2016. The imposition of MIPs is aimed at providing relief to domestic steel product manufacturers against the low-priced steel from abroad.
In terms of their financial position, steel producers are facing challenging times at present, as reflected in their falling revenues. During 2015-16, almost all the major players registered net losses. As of March 2016, the industry accounts for almost 21 per cent of the total debt under CDR cases. Going forward, the reopening of the iron ore mines is expected to boost steel production. According to the World Steel Association (WSA), India is expected to be one of the fastest growing markets in steel use. The WSA projects Indian steel demand to grow by 5.4 per cent in 2017, as compared to global steel use growth of only 0.4 per cent.
Bitumen is a by-product of the fractional distillation process of crude oil. Nearly 90 per cent of the bitumen produced in the country is utilised in the construction of roads and the remaining 10 per cent in the aviation sector and the waterproofing segment.
Production and consumption: In 2015-16, India’s bitumen production and consumption stood at 5.16 mt and 5.82 mt respectively. Between 2011-12 and 2015-16, while bitumen consumption grew at a CAGR of 5.82 per cent, production grew at only about 2.9 per cent. Since consumption is currently greater than production, the gap is met by imports. During 2015-16, India imported 750,000 tonnes of bitumen worth Rs 18.2 billion. A sharp increase in bitumen imports in the past two years can be attributed to increased construction activity in the road sector. Meanwhile, the volume of bitumen exports increased at a CAGR of 112 per cent from 5,000 tonnes in 2011-12 to about 100,000 tonnes in 2015-16.
Overall there has been a declining trend in bitumen prices largely due to falling crude oil prices. The WPI of bitumen stood at 226.9 during 2015-16. The demand for bitumen is expected to increase in the coming years with a number of road programmes recently launched by the government such as Bharat Mala, Char Dham connectivity, district connectivity and Northeast connectivity.
Geosynthetics and other materials
With a total production capacity of about 115 million square metres, the Indian market for geosynthetics is only 2 per cent of the global volume. Geotextiles has the largest share in production, followed by geomembranes and geo-grids. In the infrastructure domain, geosynthetics are widely used to construct retaining walls, steep slopes, highways, airports and municipal landfill sites, and undertake ground improvement and shore protection works, etc. The road sector is the major user of geosynthetics, primarily geogrids, that are used in road works for creating slopes, widening pavements, and undertaking rehabilitation work, erosion control, filtration and drainage. Notably, 70-80 per cent of the demand for geogrids is from the road sector, and the rest from works undertaken in the railway, airport and tunnel sectors, and in preventing coastal erosion. Some of the key players in the geosynthetics market in the country are Strata Geosystems, Techfab Geosynthetics, Terram India and GeosIndex, Enviro Geosynthetics Private Limited, Gayatri Polymers and Geosynthetics Limited.
Another material widely used in the construction sector is aggregates. Construction aggregate consists of coarse particulate material, which includes sand, gravel, crushed stone and recycled concrete. Representing two-fifths of all aggregates sales in the country, crushed stone is the most commonly used type of construction aggregate, followed by sand and gravel, each at about 28 per cent.
Aggregates are the key ingredient of concrete which is primarily used in the real estate sector. The road sector is the second largest consumer of aggregates. They are also used in railways mainly while constructing rail lines. Most of the construction aggregates in the country are produced by small- and medium-sized companies in the unorganised sector, including companies such as Blue Aggregates, SVM Stone Crushing Company and SRS Group. French multinational Lafarge is the only foreign player with significant quarrying operations in India.
The construction sector has started showing signs of revival, which spells hope for material suppliers. Construction activity is expected to increase in the coming years, backed by the government’s focus on and allocation to the infrastructure and housing sectors. Given the government’s emphasis on reviving stalled projects and the launch of several big-ticket initiatives such as the Smart Cities Mission, Sagarmala, the Dedicated Freight Corridor project, Housing for All and Bharat Mala, it is expected that the momentum of infrastructure growth will pick up. However, given the highly leveraged liquidity position of many infrastructure players and the post-award execution challenges, the recovery in the construction sector is expected to be gradual. As a result, demand for construction material will also rise gradually.