Cement demand set to be muted in FY18, may pick up next fiscal

On the demand front, based on the current trends, cement demand is expected to show a very thin growth of 1-2 per cent in FY18 and show a modest recovery only from the March quarter, rating agency Icra said in a note on Wednesday.

"A pick-up in affordable and rural housing segments and infrastructure, including roads and irrigation projects, is likely to improve cement demand to grow 4-5 per cent in FY19. However, capacity overhang and moderate demand will continue to keep capacity utilisation levels between 60 and 65 per cent over the medium-term," it said. Cement demand remained weak in the first seven months of the year due to sand shortage, slowdown in real estate activities, drought (in Southern states) and transitional issues related to the rollout of the Real Estate Regulatory Authority Act and goods and services tax, the report said. The report also warned that higher prices of pet coke, coal and diesel could put pressure on margins and debt metrics of cement companies in the coming quarters.

Cement companies have experienced rising energy and freight costs on the back of higher pet coke, coal and diesel prices in the first half of the fiscal 2018, it said, adding most of the large cement companies (barring the South-based ones) passed on the rising costs.

"Pet coke prices rose around 32 per cent in the first half. This, along with a 44 per cent jump in coal prices resulted in higher power and fuel expenses in H1 and the 7 per cent spike in diesel prices lead to higher freight cost for companies. All these put pressure on the operating profit H1.