Cement sector revival gives reason for cautious optimism

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The past few days have seen a trickle of positive news on the economy. The most ‘solid’ indicator has been the consistent performance of the cement industry over the past six months. The Q2 results of most companies have surprised both investors and the producers alike.

The industry reported another double digit YoY volume growth in October. Even sequentially the volumes in October were higher than September. There was also a nominal firming up of prices (Rs 3-4 per bag). It validates assumptions about steady underlying demand.

The most encouraging development in October was the demand pick-up at urban centres. There was greater traction from infrastructure, real estate, industrial projects. Traditionally, the period between the Rabi harvest and monsoons is time for house construction in the villages. This is also the time for release of funds by state governments for rural projects.

There were apprehensions about the pandemic impacting rural demand. But, the markets behaved in a counter-intuitive pattern for several reasons. The harvest was good. Rapid government procurement to secure food supplies during the lockdown also helped. With migrant workers returning home there was easy availability of labour. The scourge of COVID-19 was better contained in rural India. This was due to alertness at a community level and the natural social distancing in agriculture activities.

Analysts thought the Q1 sales numbers were a result of pent-up demand. They were afraid of sales tapering-off after the rains. By the end of Q2, the question was how long will the momentum sustain if the economy does not turn around. That is where the significance of the October cement numbers lie.

Though not a perishable commodity, cement is difficult and expensive to store. Apart from space, handling adds to the delivered cost. But, the biggest risk is damage by moisture absorption. Any excess booking gets corrected within weeks. So, by and large, sales reflect actual consumption. Besides, construction activities are not undertaken on impulse. Hence, cement has been a reliable indicator of economic activity.

Thus sustained delivery over six months provides a basis for cautious optimism. This is further buttressed by trends visible in urban construction and infrastructure projects. Both these developments corroborate reports of gradual return of migrant workers. Resumption of infrastructure projects will be a great source of confidence. It demonstrates the government’s resolve to kick start the economy.

The uptick in cement demand has ensured that plants have been running at pre-COVID-19 levels. Thus, there has not been any noticeable loss of jobs. The major employment multiplier of cement comes through primary and secondary transportation. With sustained volumes there were no job cuts in sales, distribution and logistics. Healthy operating margins have allayed fears of cash flow impairment. Companies have resumed greenfield and expansion projects that were on hold.

The same is true for other projects as well. The Reserve Bank of India’s interventions on injecting liquidity in the system have worked. The inflow of foreign investments will provide a fillip to private projects. In the real estate sector, builders are restarting work on old projects and announcing new ones. This is to get the working capital cycle going on the back of lower housing loan interest. The next wave should be urban and semi-urban affordable housing.

Will this trend hold? Can it withstand another round of pandemic-related restrictions? People may quibble over the economic data, but not about lowering one’s guard against COVID-19. This is not due to lockdown fatigue or complacency. There are a couple of factors that have contributed to restoring confidence.

First, there has been an exponential increase in hospital beds and testing. Second, with the rise in the number of infections, the recovery rate has also gone up. As a result, the initial mortal fear about the virus has reduced and it is no longer seen as a death knell.

This has encouraged migrant workers to return. But they need to be more careful; so should their employers, contractors and civic authorities. This should lead to enhanced wages, and better work conditions for migrants.

It is unlikely that India will go into another phase of lockdown as some European countries. So, one does not foresee another major disruption in the building and construction sector.

This trend may not be cast in concrete, but strong enough to withstand a few tremors going forward. So, banking on it will not be building castles in the air.

 Sandip Ghose is the former COO at MP Birla Cements (Birla Corporation). Twitter: @SandipGhose. Views are personal.