Addition of new capacities—coupled with oversupply—has resulted in a downturn in capacity utilisation in the cement industry. While temporary price hikes have eased the situation, the broader capacity utilisation scenario looks bleak for the industry.
Capacity utilisation in the cement industry has been declining since March 2009. As per data available on the monthly trend of capacity utilisation in the industry, the capacity utilisation in the industry has fallen to 80% in November from a high of nearly 100% in March 2009.
Overall capacity utilisation across the country declined to 77.2% in October 2009 from 84.6% a year ago. In the region-wise data available, capacity utilisation rates have fallen significantly in the southern and western regions for the month of October 2009.
In the southern region, capacity utilisation was 69.3% in October 2009, 17% less than 86.7% in October 2008. India Cements and Madras Cements are the among the cement companies who reported low capacity utilisation rates in October 2009. Similarly, capacity utilisation in the western region has fallen to 72.7% in October 2009 compared to 86.7% in October 2008.
A positive growth in capacity utilisation was witnessed only in the northern and central regions. It increased from 82.2% in October 2008 to 85.6% in October 2009 in the northern region. Similarly, capacity utilisation in the central region increased from 87.95% in October 2008 to 93.5% in October 2009.
Analysts attribute this downward trend in capacity utilisation to addition of new capacities and a pressure on the supply side. “The new capacity added is the first factor resulting in the decrease in capacity utilisation for various cement companies. Generally, new capacities in the first four to five months contribute only up to 50% of their total capacity. This is also because of the oversupply situation, where the capacity is higher, but the demand is lower,” said Priyakant Dave, research analyst, Sharekhan Ltd.
However, Mr Dave pointed out that the oversupply situation has temporarily eased in certain regions due to a wagon shortage leading to a hike in prices.
“Cement manufacturers have reduced their operating capacity utilisation to maintain the demand-supply situation. It has helped reduce their inventories,” added Amit Srivastava, research analyst, Karvy Stock Broking Services Ltd.
“Companies like India Cements and Madras Cements are among the companies who witnessed reduced capacity utilisation. They have added a lot of new capacities in the past few months,” Mr Dave said. However, he pointed out that the volume of dispatches for these companies have also improved.
As per a research note by Emkay Research, capacity utilisation in the Indian cement industry is expected to fall to 80.5% in 2010 from 91.5% in 2009, showing a marginal improvement of 80.6% in 2011 and recovering to 87% in 2012.