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What are the challenges to restart cement production?

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After a long lockdown, a few manufacturing plants may finally get started again, understandably at a much scaled-down version. Resuming manufacturing in the pockets that are relatively safe is critical as we try to strike the balance between keeping people safe and keeping people from the edge of subsistence. But are the manufacturing facilities eager to start?


In today's post, we look at an industry critical for the growth of the country - cement and analyze the factors that would make the manufacturers reluctant to start full-fledged operations.


The demand collapse


The real estate sector has been in pain for quite a while now, struggling with issues of mounting inventory, insufficient financing, and more. But it has probably never been in as dire straits as it is now. As the migrant labourers who work at these projects head back restarting operations will become tough. Financing will also be hard to come by as banks get more conservative. If you're a small developer, securing financing will be even harder. And finally, a collapse in demand as most folks defer or abandon the purchase decision given the current macro slowdown with some industry experts expect prices for real estate to drop 15-20% due to the issue at hand.


In such an environment, the only potential source of relief for the cement sector is infrastructure spend, which the government will look to ramp up as a countercyclical force to support the economy. But with strong fiscal stress on the government, as it works to support the poorest in the country, the legroom here could be limited as well.


In such a demand environment, plants would either have to be run at extremely low utilization levels or stack up their inventory, both not very attractive options for the cement players.


The logistics bottleneck


Cement is a high volume low-value industry that makes the route your truck takes to reach the customer critical. In the post corona world, the optimization algorithms that cement companies so meticulously design, sometimes with the help of external consultants could go for a toss as firms manage a grid of green, amber, and red zones to get from the plant to the source. The lack of truckers is bound to put additional pressure on the space.


Inertia - the cost of starting


In addition to the points discussed above the cement sector also has a unique problem. The cost of starting production. While most industries can simply start the switch and get started, cement is tricky. Cement kilns require temperatures to reach and be maintained at 2000 degrees or higher. The cost to start this is significant, and if the firm then has to run at sub-optimal utilization or worse halt production again, it could dent the financials of these firms significantly.


So that is where we stand today. Different parts of the economy desperate to get started, but finding themselves unable to until the other pieces get started too. A rather grim chicken and egg problem.


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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.

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