India's largest cement maker, ACC, has decided to shut its manufacturing facility at Gagal, Himachal Pradesh, for about a fortnight to quell falling demand and growing stocks.

The demand for cement has been lower, and the company wants to prevent inventories of clinker used for making cement from piling up.

Most cement companies, including ACC, dropped prices by Rs2 Rs5 per bag, passing on the excise duty cut to customers.

The government has announced an across the board 4 per cent cut in excise duty as a  part of the stimulus package (See: Centre cuts excise by 4 per cent; unveils Rs30,700 crore stimulus)  

However, this price cut may not be enough to boost demand and prices could stay under pressure for some time. On the cost side, railway freight rates are up 8 per cent adding to transportation costs (See: Government's fiscal measure too little, too late?).

The Rs 7,067-crore ACC has grown in revenue by 9 per cent in the nine months to September 2008 - a far lower rise in the top line compared with the 20 per cent rise seen in 12 months of 2007.

Overcapacity in the sector
There is increasingly fear about over-capacity in the sector from FY10 onwards. This, in turn, is likely to depress cement prices and significantly lower companies' profitability. According to various estimates, the cement industry is expected to add 35-39 million tonnes (mt) of fresh capacity in FY10, against incremental demand growth of 10-12 mt, assuming annualised demand growth of 5-6 per cent.

The possibility of either similar shutdowns or substantial cuts in capacity utilisation in the region is imminent as the overall consumption growth there is only 1 per cent, according to the latest statistics from the Cement Manufacturers' Association (CMA).

Out of the six states in the northern region, Uttarakhand, Himachal Pradesh and Punjab have shown negative growth rate in consumption to as high as 14 per cent.

However, Rajasthan and Haryana witnessed a poor consumption growth rate of 5 per cent and 4 per cent, respectively against the industry's average growth of 7 per cent.