Latest cement sales numbers demand caution as the 15 percent year-on-year fall in domestic sales is not just due to monsoon, contrary to the belief of some quarters, rather the sliding number of construction activities are more likely the cause for this decrease.
Data shows that on a month-on-month basis, domestic sales decreased by 16 percent to 1.6 million tons in July. Compare this to the historical monsoon-led drop, 20 percent between June and August last year for example, and one can easily estimate that the worse is still in the offing - and there are yet graver reasons why cement sales are not picking up.
At one end, the government has deferred its developmental projects, including housing, and at the other end, private sector confidence is still damp. In addition, the private sector doesn't have any money to start new projects as a major chunk of new deposits is being borrowed by the government.
This low level of construction activity, therefore, is expected to eat away the top line revenues of many cement makers, while price wars, in the absence of a cartel, will likely act as a catalyst to squeezing gross margins in the short term. Increased level of supply, owing to capacity expansion in yesteryears, has already pressed ex-factory cement prices to Rs 280/ bag compared to Rs 350/bag last year.
Companies in the country's north are in a state of war, as 80 percent of production capacity lies in upper region and, more importantly they are dependent on local consumption owing to a few exports avenues through land route ie Afghanistan and India.
While these trends cause many a raised eyebrow for cement in the short to medium term, In the long run, however, the sector has bright prospects. The government's recent nod over the approval of infrastructure projects included the Bhasha Dam and the likely post-conflict re-construction in Swat coupled with other motorway projects signal rising demand ahead. Stay long.