Single-digit demand growth not enough for Cement Industry

April despatch growth at 8.9% yoy; down 7.6% sequentially April cement despatches came in at 18.1 mn tonnes, up 8.9% yoy, down
7.6% mom – this is 3rd straight month of single-digit growth in cement demand.

As we enter the phase of seasonally muted demand growth with the onset of monsoons, we believe there could be downside risks to our FY11 forecast of 11% growth. Additionally, we could see demand growth tapering off in the north, as construction activity led by Commonwealth Games comes to a close. In our view, with excess capacity build-up looming on the horizon – 12 mn tonnes of annualized capacity was commissioned in April 2010 itself – single-digit demand growth would not be sufficient to arrest the price declines.

Capacity Addition:
In FY10, 42 mn tonnes of new capacity were commissioned (20% of FY09 capacity), 40% of which was commissioned in Jan-March 2010 quarter, as per CMIE. In our view, FY2011 will see the maximum adverse impact of additional capacity, as capacity in FY2010 ramps up and new capacity is commissioned in FY2011 (35 mn tonnes), leading to a seven-year-low utilization rate of 79%.