Credit ratings agency Crisil, in its latest report has said that cement demand growth is likely to witness a mid-cycle slowdown to 5 to 5.5 percent year-on-year (y-o-y) this fiscal (FY20), down sharply from 12 percent registered in previous fiscal year, due to weak government spending in first half of this fiscal (H1 FY20) and liquidity crunch faced by the real estate market. However, it noted that the profit margin for the sector would be at a six-year high on account of recent price hikes undertaken by the industry in April-June quarter and lower power and fuel costs.
According to the report, the demand growth will bear the brunt of weak government spending in first half which contributes to nearly 35-40 percent of cement demand and liquidity crunch impacting real estate market which consumes 5-8 per cement. It added that other external factors such as election-related labour shortage, issues with sand and water availability in key states further affected cement demand in first quarter of the current fiscal.
However, rating agency said cement demand growth in second half of this fiscal (H2 FY20) will be better at 8-10 percent, led by gradual pick up in government's fund release for institutional projects post higher dividend pay-out and one-time reserve transfer from RBI to government. Moreover, it said delayed but a good monsoon this season shall augur well for rural housing demand. Adding further, it said that cement prices, which have observed northward trends, are expected to soften further in months ahead as an additional 14-15 MT of capacities are to be commissioned in the second half and ramp-up of acquired capacities continues.
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