Cement Industry Faces Shrinking Margins Amid Demand Slowdown

The cement industry is bracing for a tough fiscal year with operating margins predicted to fall by up to 220 basis points, hit by weak pricing power and sluggish demand growth. Despite reduced input costs, regional price declines and capacity expansions escalate competition, pressuring profits further.

Cement manufacturers are preparing for a challenging fiscal year ahead as operating margins are projected to decline by 170-220 basis points to settle at 15-16% for FY2025, according to a report by CRISIL. The drop comes despite stable input costs, due to weaker pricing power and subdued demand.

The robust compound annual growth rate (CAGR) of 11% that the cement demand witnessed between FY2022 and FY2024 is expected to slow down to a projected 4.5-5.5% this fiscal. This slowdown is attributed to factors like the base effect, prolonged heatwaves, labor shortages during general elections, and decreased construction activity in the first half of the year.

However, the second half of the fiscal year might see some recovery, spurred by improved rural demand and increased government investment in infrastructure. While cement prices peaked at an all-time high of Rs391 per 50 kg bag in FY2023 and dropped to Rs384 last fiscal, prices are anticipated to plunge further by 5-6% this year due to moderate demand growth and heightened competition, significantly affecting profitability.

Regional pricing trends reveal varied impacts, with the eastern region likely to face the steepest drop of 11-12% due to sluggish demand and notable capacity increments. In the southern region, prices might fall by 5-6% following a 4% decline last fiscal. The northern region expects a 4-5% price drop as effective capacity rises despite no new additions. Meanwhile, Western and Central regions are projected to see more stable declines of 3.5-4.5% and 2-3% respectively, due to fewer capacity expansions. Overall, the industry has witnessed substantial capacity additions with 101 million tonnes (MT) in the last two years, and another 210-220 MT expected by FY2029, reflecting a strong 5.5-6.5% CAGR. This expansion is intensifying competition, putting more pressure on prices.

Even as input costs such as power, fuel, raw materials, and freight underwent significant rises during FY2022 and FY2023 amid geopolitical tensions, a downward correction in energy prices provided some respite in FY2024. Input costs fell by 500-600 basis points last fiscal with more reductions anticipated this year, offering a buffer against reduced realisations. However, despite cost relief, weakened pricing power paired with languid demand growth is expected to hurt profitability, with operating margins predicted to decrease to 15-16% this fiscal, emphasizing the need for strategic navigation through these challenging times.

Recovery in the second half of FY2025 is deemed crucial, with expectations of bolstered government infrastructure spending and a resurgence in rural construction demand. The cement sector will depend on these positive trends to counteract the difficult market conditions faced in the first half of the fiscal cycle. (ANI)

(With inputs from agencies.)