News: Cement prices will remain high for companies to break even: Heidelberg Cement-25/06/2020
Updated On: June 25, 2020
Cement prices will remain high for companies to break even: Heidelberg Cement
'After Diwali, most migrant labourers will return and capacity utilisation should touch 70%.'
Either the government will provide employment or employment is going to get generated in the building industry because there is a huge demand for housing, says Jamshed Naval Cooper, MD.
It is a little surprising. Despite construction activity coming to a halt during the lockdown, cement prices have managed to hold up! What explains this?
It is a very different mix. It varies from region to region, state to state. In certain states where labour is available, the demand is good. In states which depend on a lot of migrant labour, the story is different.
But if you look at it, government spending has been little higher in many of the projects -- the IHP projects. We are trying to complete these before the monsoon. Normally, you see an uptick in the demand and it is not unnatural. People try to complete their foundation jobs and external work like plastering and all that before monsoon sets in.
In central India there is better labour availability. In the south, the market is weak and very labour intensive market which depends on migrant labour and they are having a problem.
Just about every state has a different pricing. But the fact that overall the prices have managed to hold out is what I was getting at. Where did the capacity utilisation rates drop? At what level of pre-Covid utilisation level are you back at now? Can you ramp up despite the impending monsoon disruption?
Capacity utilisation will be hovering between 55% and 60%. Today many of the cement companies will have a very high breakeven. When you have high debt, you want to service it. When you service it at a lower volume, you have got to make a little more margin than what you are making at 70% utilisation. If you are to break even at 50% and if you are operating at 50%, you are not making any margins. The pressure on every cement company will be to keep the prices up because we have got to make the same amount of margin out of a lower volume.
You have seen many cycles. The present one is very unique. Would you say that construction and housing activity can perhaps see a V-shaped recovery?
If you really ask me, the construction industry is not going to be hit so badly except for the monsoon period because how else is employment generated? Building industry, construction industry is one of the largest employers of the labour workforce. If you have to provide them employment, then infrastructure has to come into the picture.
You cannot keep a cement processing plant shut continuously. We made a big mistake of having a lockdown in the cement plant but then what happened? You were not getting cement in the market. The labour force was idling around and that had a cascading effect. If we look at the sheer logistics part, a cement plant ends up generating six times the jobs that it creates in the cement industry in the construction sector. There is the external environment -- railway yards where the workmen are operating. I do not think anybody who is interested in continuing the economic growth of this country, can afford to say that construction be given the backseat. Construction will continue to be the runner in the forefront.
I think either the government will provide employment or somehow employment is going to get generated in the building industry because there is a huge demand for even housing. This is the best time for the government to use this work force to start building rural houses for the poor so that this cycle can continue. It may relent a little bit during the monsoons but we have to bear with it.
We all know how critical it is and how big a multiplier effect both construction as well as the housing industries have or real estate has as an umbrella, but the lockdown has definitely put a bit of a halt to all this activity and demand supply has been completely thrown off. How soon do you see things returning to normalcy? When will a full time recovery occur?
Now that the monsoons are setting in, we should be ready for a little bit of a slowdown in the construction industry and hence in the demand for cement. Going forward, I think labour will start returning after the monsoons sowing happens. The labour will start returning in full swing by around Diwali. After Diwali, you can see the workforce getting back to their own places, maybe in the major towns. So, at least 60% of the labour is likely to return after Diwali. After Diwali, things should be moving perfectly well.
Many issues are currently plaguing the construction sector. It has mainly been revived by the government’s infrastructure push and the state government spends like you said. Do you think a housing infrastructure push led by the government can make a material difference?
Definitely, this whole push has to be from the housing sector because 60% of the cement is used in the housing sector and in this, at least another 5-7% will come from the government. So you can talk about close to 60-70%. Even if demand was there, I would say capacity utilisations for the companies for the rest of the year should touch 70%. But let me put in a caveat. It will happen only after Diwali.
Now that you see a full blown recovery coming in only around Diwali, that is September-October, do you really think pricing can remain strong up until then? There will be the monsoon drop. So, will prices align accordingly or will they hold firm?
I think the pricing is here to stay.
You cannot break even with lower capacity utilisations. If you do not break even, the companies will be in trouble. So there is no option on pricing. Prices will remain strong.
