The cement industry is buoyed by the recent recovery in demand, which is expected to hold until the monsoon sets in. Despite demand perking up, cement producers' profit margins are under stress. Operational costs have been climbing. Power and freight costs too have risen substantially. A series of price hikes in the last four months provided marginal relief. Yet, with supply exceeding demand, the quantum of price hikes that could be implemented was also limited. Ms Vinita Singhania, Managing Director, JK Lakshmi Cement, one of the major players in the North, spoke to Business Line on the way ahead for the sector. Excerpts.
With fresh capacity going on stream, will demand recovery be sustained?
Cement demand has improved in the last few months on the back of growing demand from infrastructure companies. I hope it may sustain for a few quarters as the Budget has focused on developing infrastructure and boosting investment in affordable and rural housing. Cement sales grew 9.7 per cent in February and 6.5 per cent between April and February this fiscal. Improvement in sales has also pushed up the industry capacity utilisation to 81 per cent in February.
Has the pressure on profit margins eased?
The industry has shown admirable supply discipline to pass on the cost increases. This was achieved despite the current oversupply situation. Cement prices have increased by 35 per cent to cover costs. This has helped cement companies to maintain margins. We expect the surplus would be balanced out with the rise in demand as there is heightened activity in the construction sector. Cement makers expect nationwide cement demand to grow 7 to 8 per cent in this fiscal. It may trend toward 10 per cent levels in the longer run.
When will the demand-supply mismatch see some improvement?
Supply will exceed demand by 125.8 mtpa this fiscal, with the total capacity reaching 392.8 mtpa. The cement industry is in the midst of a cyclical downturn. While producers significantly expanded manufacturing capacities, demand growth slowed. Coinciding with the slowdown, cost of coal rose sharply. With operating rates dipping to less than 80 per cent, cement producers are now passing on the cost to the consumers. New companies set up cement capacities, but in the current cycle, most capacities are likely to be added by existing players.
What will your strategy be to maintain market share?
We are expanding our production and venturing into new markets. Our grinding unit at Jharli in Haryana is operational from this month. We are setting up grinding units in Uttar Pradesh and West Bengal. Our greenfield plant at Durg in Chhattisgarh should be operational by 2013. With the commencement of the Durg plant, our brand will also be available in Central and Eastern India. We are in the process of adding 10 more ready mix concrete (RMC) plants in the next 18 months. We have 14 RMC plants in operation and another six would come up in 15 months at an investment of Rs 140 crore.
Do you think, the railways has taken away the relief provided in the Budget?
The increase in the excise duty, which came after the recent hike in rail freight rates, has resulted in considerable increase in the cost of delivered cement. Prices have gone up by Rs 10-20 a bag in various markets. This has a cascading effect on the cost of construction and hence may have an adverse impact on infrastructure and housing growth.
Do you think the easing of trade ties with Pakistan will result in cheaper cement imports from that country?
This will provide an opportunity to both nations to improve and enhance bilateral trade. Both sides could benefit from the South Asia Free Trade Agreement.
The scope for intra-SAARC (South Asian Association for Regional Cooperation) multilateral trade has also been widened. The two governments and the private sector are required to take initiatives to explore the potential of mutual economic engagement through joint ventures.