All-India retail cement prices remained elevated throughout FY22, on account of rising input and fuel cost pressure. It is expected that the prices will remain uplifted in the short term as manufacturers will continue to pass on the rising costs.

The price hikes can be attributed to the increase in input costs as power, fuel and freight expenses rose. Power, fuel and freight costs account for about 55-60% of the industry's total operating costs.

Higher input costs remain a major concern for all cement companies and are expected to remain elevated in FY23 unless fuel prices cool off meaningfully. Companies are resorting to price hikes to pass on the sharp surge in costs. Both imported coal and petcoke prices are higher by 70% and 40%, respectively, since 1 January 2022 on account of the prolonged war between Russia and Ukraine. Furthermore, diesel prices have been raised, pushing up the overall costs of cement production.

Elevated input costs, coupled with high freight and fuel expense, have aggravated the cost pressure, which in turn has impacted the profitability of cement companies.

Cement companies are now increasingly using blast furnace slag to make cement, which is cheaper than clinker by 30-35%, which is also helping in reducing production costs.

Cement prices are expected to see an upward trend in the next two quarters by Rs 30-40 per bag to mitigate the current rising costs of fuel and diesel prices.

Cement demand expected to grow by 7-8% in the current fiscal (FY23), driven by the government's continued thrust on rural and affordable housing, increased allocation to infrastructure projects, revival of urban housing and commercial segment post the impact of COVID-19 over the past two years. Cement demand would also likely be boosted by the pre-election government spending ahead of the general elections in May'24.

Factors likely to aid demand:

1. Urban and Rural Housing:

• Demand revival expected in real estate
• Positive momentum is likely in rural demand due to the promising rabi crop outlook
• The construction of nearly 8 million houses is likely to generate demand from the rural segment

1. Infrastructure:

• 25,000 kilometres of roads are targeted in FY23
• Positive momentum is expected in urban infrastructure, Bharatmala and Metro projects
• Positive infra outlay in state Budgets

1. Industrial and Commercial:

• Implementation of PLI scheme to boost the demand further
• Aggressive targets, coupled with the PLI scheme and the rising capital expenditure
• The increasing emergence of e-commerce and retail would likely push demand for warehouse
• The government's aim of 220 airports by 2025 would further boost the demand

Cement prices rise in April as input costs bite

All India average cement prices rose by 5.5% or Rs 19 per bag in April 2022 over the previous month to to mitigate rising input costs.

Cement prices recorded aRs 15-17 per bag increase from January to February at an all-India level, peaking at Rs 390 per bag. However, prices marginally fell (Rs 3 per bag) in March to Rs 387 per bag, on the back of volume push by companies to meet year-end targets. In April, cement companies hiked prices by Rs 20-50 per bag across regions to mitigate cost increases.

Higher input costs remain a major concern for all cement companies and are expected to remain elevated in FY23 unless fuel prices cool off meaningfully. Companies are resorting to price hikes to pass on the sharp surge in costs. Both imported coal and petcoke prices are higher by 70% and 40%, respectively, since 1 January 2022 on account of the prolonged war between Russia and Ukraine. Furthermore, diesel prices have been raised, pushing up the overall costs of cement production. Power, fuel and freight costs account for about 55-60% of the industry's total operating costs.

Cement companies are now increasingly using blast furnace slag to make cement, which is cheaper than clinker by 30-35%, which is also helping in reducing production costs.

Cement prices are expected to see an upward trend in the next two quarters by Rs 30-40 per bag to mitigate the current rising costs of fuel and diesel prices. On an annualised basis, prices are expected to rise by Rs 12-15 per bag in fiscal 2023 over fiscal 2022. Historically, the industry has passed on the higher costs to consumers.

Cement demand is expected to be good for the June quarter on account of the onset of peak season, increase in construction activities given the pick-up in government projects including highways and better rural demand supported by good rabi harvest.

Cement demand expected to grow 7-8% in FY23

The cement production in the first 11 months of FY22 was at 320.55 million tonnes, which is higher by 22.5% Y-o-Y. The demand, which was adversely impacted in November 2021 due to cyclones and unseasonal rains, picked up from December 2021. The production is expected to to grow by around 18-20% and surpass pre-Covid levels to reach around 355 million tonne in FY2022

The recent budgetary allocation of over Rs 9.2 lakh crore towards agriculture, affordable housing, and capital expenditure is expected to augur well for cement demand. he cement demand is expected to grow by 7-8% to around 382 million tonne in FY2023 supported by strong demand from rural housing and infrastructure sectors.

Cement Industry Scenario

India is the world second largest cement producer (after China) and accounts for over 8% of the global installed capacity. The three most common cement types produced in India are OPC, PPC, and PSC.

The current capacity of the Indian cement industry is ~500 million tonne per annum (MTPA) and average capacity utilization ranges between 65-70%. India's cement demand is expected to reach 550-600 MTPA by 2025, due to the increasing demand in various sectors such as housing, commercial construction and industrial construction,

India's cement industry is a vital part of its economy and employs over one million people, directly or indirectly. The industry plays a crucial role in the development of the housing and infrastructure sector of the economy.

Cement demand is closely linked to the overall economic growth, particularly of the housing and infrastructure sector. With the GDP growth for FY 2021-22 is projected to be in higher single digit, the cement industry is also expected to achieve healthy growth.

The accommodative stance of RBI to push economic growth is incentivising businesses with higher credit offtake and business activities. A benign interest rate policy coupled with "work from home" practice adopted by businesses has led to increased housing construction activities. Also, focus on infrastructure sector and housing for all scheme, shall be the drivers of the demand.

Higher allocation for infrastructure–34.9% in roads, 8.7% in metros and 33.6% in railways in budget estimates of FY22, over FY21, is likely to boost demand for cement. Also, per-capita cement consumption in India stands ~230 kg, much lower than the global average of 530 kg, indicating significant growth potential for the industry in the coming years.

Cement Industry output gains 8.8%inMarch2022

All-India cement production (proxy for demand), as reported by the Office of Economic Advisor, Ministry of Commerce and Industry, increased 8.8% to 358.23lakh tonnes in March2022 over a year and higher by 17.6% over February 2022.

For FY 2022, Cement production increased by 21% to 3,564.35 lakh tonnes. Cement production decreased by 11.9% to 2,945.22 lakh tones in FY 2021 as compared to de-growth of0.9% to 3,343.66 lakh tones in FY 2020, growth of 13.3% to 3,373.22 lakh tones in FY2019, and growth of 6.3% to 2,977.11 lakh tonnes in the FY2018.

Cement WPI for April 2022

The Cement, Lime and Plaster Wholesale Price Index (WPI), with a weight of 1.644 in the WPI, inclined 5.5% to 131.6 in April2022 over a year and up by 2% over month.

Cement, Lime and Plaster WPI growth was up 4.6% for FY2022 as compared to growth of 1.1% in FY2021, growth of 4.6% in FY 2020, growth of 0.5% in FY2019, growth of 2.9% in FY2018, and growth of 0.6% in FY2017.

Meanwhile, the Ordinary Portland cement WPI, with a weight of 0.852 in the WPI, rose 5.2% at 132.2 in April2022 over the year and up by 3.2% over the month.

Ordinary Portland cement WPI grew 3.8% in FY2022 as compared to growth of 0.5% in FY2021, growth of 6.6% in FY2020, growth of 1.1% in FY 2019, growth of 3.3% in FY2018, and growth of 0.8% in FY2017.

Outlook

Cement sector saw a strong bounce back in FY22, with a production growth of 21%,reaching an all-time high, after witnessing a decline of ~12% in FY21, thanks to the government'sinfrastructure push via various schemes and allocations towards the creation of hard assets, pent-up demand and a low base effect.

Cement prices are expected to see an upward trend in the next two quarters by Rs 30-40 per bag to mitigate the current rising costs of fuel and diesel prices.Higher input costs remain a major concern for all cement companies and are expected to remain elevated in FY23 unless fuel prices cool off meaningfully. Companies are resorting to price hikes to pass on the sharp surge in costs. Both imported coal and petcoke prices are higher by 70% and 40%, respectively, since 1 January 2022 on account of the prolonged war between Russia and Ukraine. Furthermore, diesel prices have been raised, pushing up the overall costs of cement production.

Cement demand expected to grow by 7-8% in the current fiscal (FY23), driven by the government's continued thrust on rural and affordable housing, increased allocation to infrastructure projects, revival of urban housing and commercial segment post the impact of COVID-19 over the past two years. Cement demand would also likely be boosted by the pre-election government spending ahead of the general elections in May'24.