The growth in the construction materials market is determined by growth in the construction sector. A key contributor to the country’s GDP, the construction sector witnessed a sluggish trend in 2019. The election year was marked by a slowdown in economic growth that led to strong measures by the government. The recent announcement of the Rs 1 trillion National Infrastructure Pipeline (comprisesing projects across infrastructure sectors) was one such move, which bodes well for future construction activity. This, in turn, casts a positive outlook on the construction materials segment, which mainly comprises cement, steel, bitumen and aggregates. Besides, the Union Budget due next month is expected to provide more visibility with regard to immediate construction opportunities.
Production and consumption landscape
- Cement: India is the second largest producer of cement in the world (after China). The private sector-dominated industry has an installed capacity of about 500 million tonnes per annum (mtpa) distributed across 200 large and about 350 small plants.
During 2018-19, cement production was recorded at 337 mt, a significant increase from 297 mt in 2017-18. In 2019-20 (till August 2019), 138 mt of cement was produced. The under utilisation of production capacity (at about 70 per cent) remains a trend in the industry. In terms of consumption, of the 337 mt produced in 2018-19, 328 mt was consumed. With regard to trade, in 2018-19, India’s cement exports were worth over $430 million, while imports were worth over $140 million.
- Steel: The country is also a major producer of steel, an important construction input. The steel sector, with an installed capacity of 142 mtpa, also continues to underutilise production capacity (75-78 per cent).
During 2018-19, 101 mt of finished steel was produced, a decrease from 127 mt recorded in 2017-18. The figure stood at about 60 mt in 2019-20 (till October 2019). Consumption of the metal during 2018-19 was 99 mt, an increase from 91 mt in 2017-18.
On the trade front, India’s steel exports in 2018-19 were 6.36 mt, a year-on-year reduction of about 34 per cent. While imports of the metal have hovered at around 7 mt for the past three-four fiscal years, imports as a share of consumption have been on a consistent decline (7.9 per cent in 2018-19).
- Bitumen: A key input in construction of roads and airports, bitumen also finds use in waterproofing, adhesives and insulation applications. During 2018-19, 5.56 mt of bitumen was produced, slightly up from 2.27 mt in 2017-18. In 2019-20 (till November 2019), the output was 3.02 mt. Consumption figures stood at 6.61 mt in 2018-19, roughly the same level registered in 2017-18. The excess demand has been met by imports.
- Geosynthetics and other materials: According to industry experts, India’s annual demand for geosynthetics is expected to reach 300 million square metres by 2020. Aggregates are another type of material widely used in construction. Aggregates are a key ingredient of concrete which is used primarily in the real estate sector. Apart from road construction, aggregates are also used for constructing railway tracks.
Price movements
Prices of both cement and steel showed a sluggish to declining trend during the past 10-12 months, as a response to factors such as feeble demand, the monsoons, general elections, and an overall economic slowdown. Some recovery in prices, however, was witnessed towards the close of the year. A pick up in construction works that resumed after the rains lent some momentum to the price trend in November when some steel producers increased the prices of flat steel by Rs 500-Rs 750 per tonne and those of long steel by up to Rs 1,000 per tonne. Cement exhibited a similar trend, with some inter regional variations.
Key trends
- Capacity addition: While both the cement and steel industries are operating at sub-optimal utilisation levels, players continue to add fresh capacity in anticipation of higher demand in the coming years.
In the steel industry, fresh capacity additions to the tune of about 28 mtpa are under way. Entities such as JSW Steel, ArcelorMittal Nippon Steel India Limited and Tata Steel, among others, are pursuing their expansion plans in line with the government’s vision of reaching 300 mtpa of production capacity by 2030.
In the cement industry, 23 mtpa of capacity addition is imminent on the back of works under execution by players such as UltraTech (4 mtpa), JK Cement (4.2 mtpa), Dalmia Bharat (3.5 mtpa) and Ramco (2.1 mtpa), among others.
- Big-ticket deals: Industry heavyweights in both the cement and steel sectors are taking the inorganic route for increasing their market share.
In steel, the biggest development was witnessed last month, when ArcelorMittal, the world’s largest steel manufacturer, formed a 60:40 joint venture with Nippon Steel to form ArcelorMittal Nippon Steel India Limited, which will also be the new owner of Essar Steel India Limited (ESIL). The Rs 420 billion acquisition of ESIL closed in December 2019, marking the largest stressed asset deal witnessed in the country so far.
Meanwhile, cement manufacturers such as UltraTech are actively scouting for assets for another round of acquisitions. In December 2019, the company emerged as a strong contender to buy the Emami Group’s cement business.
- New materials: In the near to medium term, innovative, cost-effective and sustainable construction materials are expected to become a new normal in the construction sector. This has been formalised with the introduction of the draft National Resource Efficiency Policy in September 2019, which aims to promote recycled materials for new construction works. Besides, it also looks to enhance re-use of construction and demolition waste.
Outlook
The growth potential for the construction materials market in the near-medium term seems significant, as the government looks to restart the economic engine through infrastructure development. The recently announced NIP points towards a revival in construction activities, which would translate into a higher demand for key inputs such as cement and steel. Moreover, according to SBI Securities, during the first seven months of 2019-20 all the state governments together deployed only about 30 per cent of their 2019-20 capital expenditure budget, indicating that there will be fresh works in the offing, before the close of the financial year.
Apart from a strong infrastructure project pipeline, industry-specific developments also give some cause for optimism. Capacity ramp-up by key players, big-ticket takeovers, and emerging trends such as deployment of new construction materials are expected to bode well. However, high goods and services tax imposed on cement and steel (along with prohibitive stamp duty and registration charges) requires some corrective measure in a timely manner. The onus thus rests with the government, which is urgently looking for ways to give a push to economic activity.