Slow Pickup

Infrastructure push to stimulate demand for construction materials

The construction sector has been exhibiting dismal growth in the past few quarters, particularly in the last quarter of 2016-17, during which the growth rate turned negative. This was primarily on account of the government’s demonetisation move (which had a spillover effect on the construction industry)

coupled with muted demand from end-user industries. Consequently, demand for key construction materials – cement, steel, bitumen and geosynthetics – remained sluggish, thereby widening the demand-supply gap. 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.

Cement

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 segments are commercial, institutional and industrial buildings.

  • Production capacity: The total installed production capacity for cement in the country stood at 420 million tonnes (mt) in 2016-17. Between 2012-13 and 2016-17, production capacity grew at a compound annual growth rate (CAGR) of 4.7 per cent. The capacity utilisation rate of the industry declined to 65 per cent in 2016-17 from 71 per cent in 2015-16. 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 280 mt of cement in 2016-17, registering a decline of 1.2 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 remained stagnant at around 270 mt in 2016-17 vis-à-vis 269 mt in 2015-16. Demand for cement was affected by the liquidity crunch in the market on account of demonetisation, muted demand from the real estate sector and the slow pace of project execution in the infrastructure sector.
  • Exports: India was largely a net exporter of cement from 2012-13 to 2016-17. Cement exports and imports, in terms of value, stood at Rs 20.02 billion and Rs 8.53 billion, respectively, during 2016-17. A country-wise analysis shows that around 90 per cent of the cement exports are to Sri Lanka and Nepal.
  • Prices: From 2012-13 to 2016-17, cement prices exhibited an upward trend, with 2013-14 being the only exception. The increase was more pronounced during 2014-15 and 2016-17. The wholesale price index (WPI) for cement increased to 175.5 in 2016-17, witnessing a year-on-year growth of 1.05 per cent. The surge in prices has been mainly to cover production costs as the volume of sales has not kept pace with production. Besides, an increase in input and logistics costs continued to exert upward pressure on cement prices.

Steel

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. The three sectors account for two-thirds of the total steel consumption in the country.

  • Production capacity: The total installed production capacity of steel stood at 126.33 mt in 2016-17, recording a year-on-year growth of 6.9 per cent. During the five-year period 2012-13 to 2016-17, 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 2016-17, 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 iron ore mines in Goa, Karnataka and Odisha.
  • Production and consumption: In 2016-17, India’s steel production and consumption stood at 100.74 mt and 83.65 mt respectively. From 2012-13 to 2016-17, steel production increased at a CAGR of about 5.4 per cent. The growth was backed by the strong measures by the government such as minimum import price (MIP) (to rein in cheaper imports) and higher allocation towards the infrastructure sector in the budget. In the past five years, consumption growth was sluggish due to slow industrial growth and dismal project execution in the infrastructure space. Post-demonetisation, steel consumption is expected to remain under pressure to a certain extent in the coming months. This is because it is likely that the demand for steel from user industries like construction and real estate will take some time to strengthen. However, government push towards infrastructure development will compensate for this reduction in demand.
  • Exports: After a gap of three years, India turned a net exporter of steel in 2016-17, aided by stiff tariff barriers restricting imports. With many importing countries restricting shipments from China with the imposition of high duties, exports from India are set to continue rising. During the period 2012-13 to 2015-16, India remained a net importer of steel. 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. However, backed by the government’s protectionist measures, domestic steel manufacturers increased output in 2016-17. A country-wise analysis shows that India has been exporting steel to countries such as Italy, Iran, the UAE, the US and Belgium.
  • Prices: During the period 2014-16, domestic steel prices exhibited a declining trend largely due to falling iron ore prices and pressure from depressed global steel prices. 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 MIP in February 2016. Steel prices continued to increase, albeit moderately, till March 2017, due to a revival in domestic consumption demand and a sharp increase in international iron ore and coal prices.

Bitumen

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.

In 2016-17, India’s bitumen production and consumption stood at 5.18 mt and 5.89 mt respectively. Between 2012-13 and 2016-17, while bitumen consumption grew at a CAGR of 5.92 per cent, production grew at only about 2.63 per cent. Since consumption is currently greater than production, the gap is met by imports. During 2016-17, India imported 951,000 tonnes of bitumen worth Rs 16.38 billion. A sharp increase in bitumen imports in the past two years can be attributed to increased construction activity in the road sector. Overall, there has been a declining trend in bitumen prices largely due to falling crude oil prices. The WPI of bitumen stood at 230.5 during 2016-17.

Geosynthetics and other materials

India’s geosynthetics market size was estimated to be around 138 million square metres in 2016, constituting only 2 per cent of the global volume. The geosynthetics market in India has witnessed a growth rate of 8-9 per cent in the last two-three years. As per industry experts, India’s annual geosynthetics market in 2015 involved the sale of around 130 million square metres, which is expected to expand to 300 million square metres by 2020. Roads and pavements accounted for over 30 per cent of the total volume, which is in line with the global trend. According to industry experts, manufacturing plants in the country are running at a capacity of 50-70 per cent.

Another material widely used in the construction sector is aggregates. Aggregates are the key ingredient of concrete, which is used primarily 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.

Conclusion

The launch of several big-ticket programmes such as the Smart Cities Mission, Sagarmala, the Dedicated Freight Corridor project, Housing for All and Bharatmala bode well for the infrastructure sector, in general, and the construction industry, in particular. However, given the highly leveraged liquidity position of many infrastructure players and the post-award execution challenges, recovery in the construction sector is expected to be gradual. As a result, demand for construction material will also rise only gradually.

 

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