Cement Sector Revival Optimistic for Economy

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. 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.