Cement sector continues to face headwinds: ICRA

Credit rating agency Icra today said the outlook for the cement sector continues to remain challenging due to rising input costs, unfavourable demand-supply scenario and overcapacity.

"In view of rising input costs, unfavorable demand-supply scenario and continuance of fundamental issues plaguing the cement industry, the outlook for the sector seems challenging," Icra said in a report.

The fundamental issues affecting cement demand in FY11 and H1 FY12 continue to persist, it said. "Subdued demand and significant capacity addition had put pressures on capacity utilisation of the cement industry.

Apart from unfavorable demand-supply scenario, the industry is also reeling under the pressure of rising input costs." Prices of key raw materials like limestone and gypsum have increased, it said. "Besides, the increase in domestic coal prices and non-availability of low-cost linkage coal has increased the power and fuel cost for cement manufacturers."

Cement companies depending on imported coal have seen some easing in cost pressures due to decline in price of imported coal, the rating agency said.

"However, the benefit of declining prices has been offset by rupee decline to some extent. In addition, the freight costs have increased due to increase in surcharge and cess by the Railways last year and hike in freight rates for some commodities in March. The recent hike in diesel prices will further escalate the cost of production for cement companies."

In the long-term, however, the agency expects the sector to see higher demand from residential and commercial space, huge investments planned in the infrastructure sector and government expenditure under various schemes.

However, it cautioned that since cement demand is correlated with economic development, the extent to which the issues affecting investment in projects are addressed, would be critical.