Cement industry likely to see upturn: Deutsche Bank

Despite challenges arising from overcapacity which is putting pressure on margins, the cement industry is likely to see a cyclical upturn in the near future mainly due to absence of a strong logistical supply movement, Deutsche Bank said in a report.

“Our analysis suggests that the absence of a strong logistic supply movement could make inter-regional cement and clinker shipments more difficult. This is raising our hopes that tightness in cement markets could be achieved well ahead of the cyclical upturn estimated in late FY14,” the report said.

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Currently, Railways account for as much as 45 percent of cement movement and 70 percent of clinker movement, the report said. Volumes have grown at around 10 percent over the last three quarters, despite slowing GDP growth, and thus suggesting a lower correlation with GDP, it said.

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“Cement as a commodity is extremely voluminous and among the lowest value-added, so logistical constraints in both intermediate supplies and finished goods supplies have the power to result in supply disruptions and plant closures,” the report said.

Besides, improved demand is likely to remain ahead of incremental supply over the next two years, it said. “The incremental supply situation is unlikely to see a meaningful change in the near-to-medium term, given the delays in land acquisitions and clearance procedures for setting up units,” Deutsche Bank said.

Moreover, the currently prevailing cement prices need to move up by 10 percent for new capacity to generate returns equivalent to the cost of capital-this effectively could result in the next round of capacity additions in the industry being delayed, it added.

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