The Rs 85,000 crore (Rs 850 billion) domestic cement industry is fast realising the painful situation it is getting into, as the GDP growth rate is on a slippery path and over 70 million tonnes of fresh capacities are in the pipeline in the next two years.

The industry added capacity worth 30 million tonnes in FY08 and is estimated to add 45 million tonnes and 30 million tonnes in FY09 and FY10 respectively. Top industry players have voiced concerns regarding production growth rates and slowing consumption.

"As substantial capacity is being built, there will be losses. The consumption growth will not be equally robust, resulting in prolonged pain for the industry," said H M Bangur, president of Cement Manufacturers' Association and managing director of Shree Cement.

The industry will have huge capacities by 2010 with the addition of 20 million tonnes in the last six months and 70-80 million tonnes in the pipeline, he added. The cement demand has a 1.3x correlation with the GDP. The capacity utilisation is expected to come down by as much as 85 per cent in the current financial year from 95 per cent in the previous financial year due to capacity addition and expected slowdown in the construction and housing sectors. And in FY10, it is expected to slip below 80 per cent.

Kumar Mangalam Birla, chairman of the Aditya Birla group, recently said the cement production growth would be 6 per cent in FY09. This is an indication of consumption de-growth.  Bangur, however, ruled out any fear of surplus capacity as the industry will be ready well in advance for higher consumption.

Sources in one of the leading multinational cement companies, said, "The cement business is cyclical and this is not the first time that we are in it. The situation is not that worrisome this year, but the signals can be worrying as access supply hits us next year."

R C Gupta, president, Mangalam Cement [Get Quote], a part of the B K Birla group, said, "Of course, there is fear as plans are being deferred and there are no fresh investments in the sector."

The 203.51 million tonne industry is expected to add 45 million tonnes in FY09. Taking into account a delay of 4-6 months, the overall addition could be around 32 million tonnes, taking the total capacity to 230 million tonnes by March 2009.

Pawan Burde, a senior research analyst tracking the cement industry at Angel Broking, said, "Even if consumption grows by 10 per cent in FY09 and capacity utilisation is 85 per cent on a capacity of 230 million tonnes, there will be surplus of around 15 million tonnes." The cement despatches in 2007-08 were 167.67 million tonnes.

The prices of cement will not rise in such a scenario. We expect a 10-15 per cent decline in the prices over the next year, Burde added. The average price of cement is Rs 230-235 per 50 kg bag.