Budget 2023 impact: Cement, steel demand to strengthen, but not prices

The cement and steel sectors have clearly gained from the Rs 10 trillion kitty marked for infrastructure in the 2023-24 union budget. However, even as a demand spike is expected, the prices of these building materials may remain on a weak wicket.

Among the key budget announcements that have caused steel and cement companies to feel bullish are a 33 percent increase in allocation for key infrastructure sectors, 66 percent higher outlay for Pradhan Mantri Awas Yojana (PMAY), highest ever outlay for railways in the last decade, and plans for 50 new airports. Each of these are expected to further boost the already robust demand for steel and cement.

“Cement demand is expected to ride on Infra and housing push. Further increased outlay for railways and fifty new airports is also positive for the sector,” said Ravleen Sethi, Associate Director, CareEdge Ratings.

In their budget review, analysts at Angel Broking noted that PMAY will help generate demand for housing projects, and thus will be positive for all cement companies – UltraTech Cement, JK Cement, JK Lakshmi, Shree cement, and others.

Metals to gain from last mile focus, clean energy announcements

In addition to demand gains likely from increased spending for infrastructure and housing, industry experts counted other positives as well. Announcements regarding the improvement of first- and last-mile connectivity is expected to ease logistics for the metals sector.

Vikram Mehta, Partner, Mining & Metals Leader, in India, said, "The announcement about the improvement of last-mile connectivity is a significant plus for the sector. Globally, transportation costs go up to about 8 percent of GDP, in India, it is 12-14 percent of GDP. So any relief thanks to ironing out issues around transportation is a plus.”

In her budget speech on Wednesday, Finance Minister Nirmala Sitharaman said that 100 critical infrastructure projects for the first- and last-mile connectivity of ports, coal, steel, fertiliser, and food grains sectors have been identified. The projects entail investments worth Rs 75,000 crore, including Rs 15,000 crore from private sources, and will be taken up on priority.

Cement sector executives are also hopeful that focus on green capex will help the industry meet its energy needs. “The government’s focus on green capital expenditure will help address the industry’s energy needs,” said Jayakumar Krishnaswamy, Managing Director, of Nuvoco Vistas Corp, a cement manufacturer.

In her speech, the Finance Minister said that a Green Credit Programme will be notified under the Environment (Protection) Act, to incentivise environmentally sustainable and responsive action by companies, individuals, and local bodies, and to help mobilise additional resources for the same.

The price challenge

JSW Steel reported its highest-ever crude steel production for the December quarter. UltraTech Cement has reported a double-digit volume growth for the first three quarters of this financial year. Demand for steel and cement in India has been on a rise, pushed by increased infrastructure and housing spends. The recent budget allocations will take this demand growth story further. However, not everyone is confident that it will translate into sustained price hikes.

“Even if the increased demand leads to price hikes, can they be sustained? Cement prices are already at their peak for the past two years due to prolonged inflationary pressures. Cement companies will need to focus more on cost reduction for margin expansion,” Sethi said.

For steel, Mehta points out that international factors will decide price movement. “Domestic demand is robust and supported by increased infrastructure spending, and an uptick in the construction, manufacturing, and automobile sectors. This will provide the required impetus to domestic prices, but primary drivers will be international trends in demand and supply, specifically with regard to the situation in China, and a potential recession in Europe,” he said.