Displaying items by tag: Overcapacity
Closing the demand gap in India
04 October 2017It’s been a pessimistic month for the Indian cement industry with Ministry of Commerce & Industry data showing that cement production has fallen year-on-year every month since December 2016. This was followed by the Cement Manufacturers Association (CMA) saying that the industry was sitting on 100Mt/yr of excess production capacity. Now, the credit ratings agency ICRA has followed the data and downgraded its forecast for cement demand growth to not more than 4% for the 2017 - 2018 financial year.
Graph 1: Annual cement production in India. Source: Ministry of Commerce & Industry.
Graph 2: Monthly cement production growth rate year-on-year in India: Source: Ministry of Commerce & Industry.
Graph 1 shows a production peak in the 2015 - 2016 financial year before falling monthly production broke the trend in the 2016 - 2017 period. Graph 2 pinpoints the month it started to go wrong, November 2016, when the government introduced its demonetisation policy. Production growth went negative the following month in December 2017 and it hasn’t managed to right itself since then and grow. It’s convenient to blame the government for the slump in production but it troughed in February 2017 before taking a lower level of decline since then.
The Reserve Bank of India (RBI) annual report in August 2017 suggests that the policy failed in its principal purpose of reducing the kind of corruption that a cash heavy economy can hide such as tax avoidance. People reportedly managed to find ways to bypass the bank deposit limit and may have successfully laundered large amounts of cash without being caught. However, as commentators like the Financial Times have pointed out, the longer term implications of forcing the economy towards digital payments and increasing the tax base could yet be beneficial overall.
Graph 3: Cement production capacity utilisation rates in India. Source: UltraTech Cement.
Moving on, the CMA has blamed production overcapacity for the current mess and Graph 3 shows the problem starkly. If anything the CMA appears to have downplayed the over capacity crisis facing India, as UltraTech Cement’s figures (using data from the Department of Industrial Policy and Promotion) show an overcapacity of 155Mt in the 2016 – 2017 year and this will grow to a forecast 157Mt in the next financial year, even though the utilisation rate is expected to rise slightly. UltraTech Cement’s estimates don’t see the utilisation rate topping 70% until the 2020 – 2021 financial year. Analysts quoted in the Mint business newspaper concur, although they reckoned it would the rate would bounce sooner, in 2019 - 2020. Last month when the CMA moaned about the industry's excess capacity it pinned its hopes on infrastructure schemes like the Mumbai-Ahmedabad bullet train. This prompted an official at JK Cements to say that he didn't think that one train line was going to make much of a difference.
This is one reason why ICRA’s and the other credit agencies’ growth rate forecasts for cement demand are important, because they indicate how fast India might be able to close the gap between production capcity and demand. Unfortunately demonetisation scuppered ICRA’s growth prediciton for 2016 – 2017. It forecast a rate of 6% but it actually fell by 1.2%! So downgrading its forecast for 2017 – 2018, with fears of weather and the implementation of the Goods and Services Tax (GST) in the second half of the year, is ominious. Major cement producers such as Ultratech Cement and Ambuja Cement have based their road to recovery in their latest investor presentations on a 6% growth rate or higher. Pitch it lower and the gap doesn’t close. Here’s hoping for a brisk second half.
Indian cement producers continue to defend prices
12 June 2017India: Sagar Cements, India Cements and Bharathi Cements have continued to defend public concerns over cement pricing due to economic trends beyond their control. In a press conference the producers blamed rising input costs, distribution costs, taxes and high margins by dealers, according to the Times of India newspaper. They added that the key demand drivers for the industry are residential house building and government projects.
S Srikanth Reddy, Executive Director of Sagar Cements forecast that cement demand will rise by 10 – 18% in Telangana and Andhra Pradesh over the next two to three years due to large government-run infrastructure projects. Tamil Nadu and Kerala are expected to rise by no more than 5% and Karnataka is expected to rise by 2 – 5%.
However, despite increases in the short term, the cement producers forecast problems for the industry in the south of the country, and in Andhra Pradesh and Telangana in particular, due to production overcapacity as producers increased their installed capacity in anticipation of high demand. At present they say that producers are forced to run plants at 60% production utilisation rates with high volatility in price rates in a highly fragmented market with over 50 brands.
Chinese planners consider 10% cut in cement production
09 March 2017China: The National Development and Reform Commission (NDRC) is considering aiming for a 10% cut in cement production. The Chinese state planning body announced on 6 March 2017 that it is pushing to cut production capacity in a number of industries including coal, steel and cement, according to the Nikkei Asian Review. Some sources place Chinese cement production capacity at up to 3.5Bnt/yr and 30% of this is believed to be surplus. The commission intends to cut production capacity through market control and legislation. The change in policy from the NDRC coincides with the third consecutive year that China’s annual target for real economic growth has been lowered.
Algeria: Serge Dubois, the head of communications at LafargeHolcim Algeria, says that Algeria faces a cement production overcapacity of 10Mt by 2019. In an interview with a local radio station he added that the country will overproduce 1Mt in 2017 and that it imported 3.5Mt in 2016, according to Maghreb Emergent. LafargeHolcim intends to diversify its product range to cope with this anticipated production glut with a focus on roads, airports and industrial users.
Indonesia faces overcapacity
23 November 2016Holcim Indonesia inaugurated a new cement terminal in Lampung last week. Unfortunately, the spectre of industry overcapacity haunts the country at present and the subsidiary of LafargeHolcim may be late to the party. The Indonesian Cement Association (ASI) has been publicly warning the government of overcapacity since the end of the summer. Its first line of action has been to lobby for restrictions on producer permits to slow the growth of new plants.
ASI figures show that cement sales in September 2016 fell by 3.3% to 5.64Mt compared to August 2016 due to lower residential sector demand. Domestic cement sales rose by 2.95% year-on-year to 44.7Mt in the first nine months of 2016 and the ASI expects sales growth of 3 – 4% for 2016 overall. Yet, the risk of overcapacity is stark. Cement production capacity has nearly doubled from 59.3Mt/yr in 2012 to 92.7Mt/yr in 2016 but demand is projected to only reach 65Mt in 2016, leaving a production oversupply of 27.7Mt. Regional consumption has fallen in Jakarta, Banten and West Java, particularly in the first two. Elsewhere, it has grown, particularly in Central Java, as well as Yogyakarta and East Java to a lesser extent.
Initial Global Cement Directory 2017 research places active production capacity at 66.3Mt/yr suggesting that the ASI may be exaggerating the risk of overcapacity. The additional c30Mt/yr capacity arises from plants that have been proposed, that are actually under construction or that have been mothballed. However, the ASI data should be more accurate as it represents the local producers. Either way, capacity is growing faster than consumption as can be seen in graph 1.
Graph 1: Cement consumption and production capacity in Indonesia, 2012 – 2016. Source: Indonesian Cement Association, Global Cement Directory 2012 – 2017.
Semen Indonesia, the country’s largest producer, reported that its revenue fell very slightly to US$1.4bn in the first nine months of 2016 and its net profit fell by 8.4% to US$215m. It blamed this on a fall in sales volumes and prices due to rising competition. The other large producers have said similar in the past. Indocement, the country’s second largest producer after Semen Indonesia, saw its revenue fall by 11.9% to US$837m in the first nine months of 2016 and its profit fell by 2.2% to US$231m. LafargeHolcim described the market as affected by overcapacity and ‘a difficult competitive environment.’
Back in May 2016 a feature on the predicament facing the Indonesian cement industry in the Jakarta Post suggested that producers were building new capacity despite the risks of overcapacity to win market share. Cement producers are about to find out whether this will work or not. Meanwhile it seems unlikely that the measures the ASI is suggesting will do much to alleviate the looming crisis. Still, on the positive side, it’s looking like a good time to buy cement as a consumer.
For more information about the cement industry in Indonesia view the first part of the Association of South East Asian Nations (ASEAN) feature in the October 2016 issue of Global Cement Magazine
Indonesian government to tackle cement industry expansion
10 October 2016Indonesia: Industry Minister Airlangga Hartarto has said that the government is preparing regulations to restrict new cement plant permits being issued in a bid to maintain stable cement prices. The ministry’s director general for chemicals, textile and miscellaneous industry, Achmad Sigit Dwiwahjono, has also confirmed the proposed regulation, according to the Jakarta Post. Airlangga added that his ministry has also been considering other measures to tackle cement oversupply.
The Indonesian Cement Association (ASI) has lobbied the government to take action on oversupply. Cement production capacity has nearly doubled from 59.3Mt/yr in 2012 to 92.7Mt/yr in 2016. However, demand is projected to only reach 65Mt in 2016, leaving a production oversupply of 27.7Mt.
Vietnamese ministries ordered to revise cement industry strategy
30 September 2016Vietnam: Deputy Prime Minister Trinh Dinh Dung has asked the ministries of industry and construction to revise the zoning plan for mineral mining for cement production and the cement industry development strategy to meet actual demand. The Ministry of Construction has said that the zoning plan to 2020, which was originally approved in 2010, needs changing following recent geological surveys, according to the Vietnam News Agency. The ministry is also compiling a cement industry development strategy for the 2017 - 2035 period with a vision towards 2025.
The construction ministry will collaborate with provinces and cities to look into the investment and exploitation of minerals for cement production, supply and demand for clinker and cement as well as using heat at cement plants for electricity generation. The country has 70 operational cement production lines with a production capacity of 82Mt/yr but consumption is 72Mt/yr. The government has approved shutting down 14 cement plants with a daily capacity of less than 2500t of clinker each, equivalent to 910,000t/yr, from the strategy since 2011.
Indonesia: The Indonesia Cement Association (ASI) has urged the government to restrict the issuance of new licenses as the country's cement industry has been experiencing oversupply. Widodo Santoso, chairman of the ASI, told an industry seminar that there are 13 cement producers in the country with total production capacity of 92Mt/yr but that local demand is only reaching 63 – 65Mt/yr, according to Cogencis.
"The government should restrict investment in cement industry by leading the new cement investment to outside Java where there is no cement industry," said Santoso said.
Santoso added that 10 cement plants opened in 2015 and that four more are set to start operation in 2016. By 2017 the country’s cement production capacity may surpass 100Mt/yr. He recommended that local producers increase their exports. The ASI estimates that exports will increase to 2Mt/yr in 2016 from 0.5Mt/yr in 2015. Countries such as Bangladesh, Sri Lanka, Australia, African countries, and West Asian countries are among the destinations.
Ministry of Industry and Information Technology considering guidelines on eliminating outdated cement capacity
02 March 2016China: The Ministry of Industry and Information Technology (MIIT) and related departments are considering draft guidelines on eliminating outdated production capacity in cement, ship-making, electrolytic aluminium and glass industries, according to Xinhua. At least 500Mt of ‘low-grade’ cement production capacity will be phased out.
The central government decided to promote supply-side reform at the end of 2015. Eliminating outdated capacity is a top priority. Methods to do this include phasing out outdated capacity, removing ‘zombie’ enterprises and promoting industrial reorganisation.
Kong Xiangzhong, vice president of China Cement Association, has advised the central government to provide certain compensation for the industry and establish a special fund so as to appropriately deal with the re-employment of redundant personnel and enterprise debts. Several provinces have specified their targets. Guangdong Province plans to cut clinker production capacity to 110Mt by the end of 2018.
China: The Vice minister of Industry and Information Technology, Xin Guobin, recently led a delegation to investigate excessive cement capacity in north-east China. Xin urged local governments, industry associations and key enterprises to work together, further reduce excessive capacity and try to reverse losses in the cement industry in the region.
Companies including Yatai Cement, Liaoning Daying Cement Group, Inner Mongolia Mengxi Cement Co., Ltd, Sunnsy Cement and China Tianrui Group Cement Company Ltd have all set up cement clinker production lines in north-east China.