Notwithstanding the challenges and uncertainty in cement industry, JSW Cement through its subsidiary Shiva Cement plans to invest ₹1,500 crore last year in capacity expansion.
The company is bullish on future demand. Nilesh Narwekar, CEO, JSW Cement shares his view on year ahead with BusinessLine.
Do you expect the current buoyancy in cement demand to sustain going ahead?
The demand will definitely pick up due to the pent up demand and restart of infrastructure projects put on hold due to Covid. Moreover, many of the cement consuming segments are expected to outperform while a few may remain stagnant. We see lot of activity around infrastructure space leading to enhanced cement demand in the near future.
Various state governments are firming up plans for construction of low cost house, cementing existing roads and spending on other infrastructure projects. Housing segment in the rural areas and small towns have recovered nicely and inching towards pre-Covid level.
However, houses being constructed by builders in big cities may take longer time to recover. On the whole real estate and construction segments would face a slowdown given the current trend.
The first two quarters of this fiscal were pretty bad for cement sector due to Covid and monsoon and we see the pent up demand stretching up to the end of this fiscal. Thereafter the pick up in economy and good harvest would support demand.
Will the government be able to continue spending on infrastructure given its tight financials and focus on health care?
Yes. As per our reading the government is spending only on projects that were planned earlier and allocation of fund have been decided. The incremental investment over what has been planned is limited.
I think the government will continue to invest in planned infrastructure in the immediate future, say up to next March or till first half of next fiscal.
The entire cement industry is very bullish on next fiscal prospects. We believe the financials of the government should also improve from next fiscal.
All parts of the economy are already showing signs of improvement.
What is the logic behind cement companies announcing fresh capex when the demand is low?
Yes, there could be couple of quarters of supply outstripping demand in few regions but there is nothing to worry. While the growth in cement demand has always been gradual, the addition in supply side happens in spurt.
The optimism comes from the fact that cement companies in north and central regions are operating at a fairly high capacity utilisation levels.
The movement utilisation level hits an optimal level, market leaders always announce fresh capacity addition. Our capacity expansion through Shiva Cement is more strategic.
The industry’s capacity utilisation levels are currently low 60 per cent, but it is much higher in regions where the fresh capacities are being added.
Cement companies in many regions including ours are operating at pre-Covid levels. This despite many constrain last month and we expect December to be much better.
Do you expect raw material prices to increase?
The power, fuel and logistics expenses are the major cost for cement companies as it accounts for 50-60 per cent of overall production cost depending on the efficiency. Logistics cost depend on cement factories proximity to market and distance between production centre and source of raw material.
Logistics cost can be controlled by improving efficiency. Despite diesel prices remaining volatile, cement companies are managing cost by choosing right market to sell and better negotiation with the transporters.
The rise in coal price has already pushed up power cost. In a way, it is good as the increase in coal prices indicate the revival in economy.
We expect power cost to go up, but with the economy activity picking up the cement demand and prices to remain firm.
How do you the user industry concern over high cement prices?
At the end of the day, cement prices are driven by demand and supply. When the cost for cement production increases it has to be passed on.
We expect cement prices to look good till June-end because the demand is expected to be robust. The prices will start falling once the monsoon sets in.