What are the Determinants of demand for cement?

Answer 1

1. Cement demand - High correlation with GDP :

Cement demand is directly linked to economic activity. Since infrastructure investments and construction activity, which are the main drivers of cement demand, are key components of GDP, cement demand growth has high correlation to GDP growth. Further, housing (both rural and urban), also a determinant of cement demand, depends on agricultural productivity and income levels, which are again a key components of GDP.

2. Shift in population profile:

Continued growth in population and change in population profile also effect on the demand of cement. Based on decline in average age of home purchasers coupled with higher income levels, we believe that the population within the 25-44yr age group is critical to the growth in housing demand as well as the cement demand will also increase.

3. Income Level:

Strong economic growth helps boost disposable income. This coupled with easy availability of finance enables households to migrate from nonpucca houses to urban pucca housing and results in increase in demand for larger houses, thereby raising average size of dwelling units. Thus it will also increase the demand of cement as it is the main component of building houses.

4. Infrastructure development:

The demand of cement industry depends on infrastructure facilities in the field of coal & power supply and rail transportation for its sustainable development. Good number of large infrastructure construction projects like Padma Bridge, Flyovers, and highways are on the pipeline. So there is a huge demand of cement for this type of infrastructural development.

5. Access of loan/finance:

The expansion of mortgage lending and construction reflects a greater demand for infrastructure building, to be beneficial for the cement industry. Now-a-days many financial institutes are providing home loans and commercial loans, which may help to boost up the demand of cement.

6. Nuclear families and urbanization:

The joint family system in Bangladesh has been gradually moving towards nuclear families. Migration of population towards urban areas due to better job opportunities coupled with rapid urban infrastructure development would affect the increase of the demand of cement. Hence, with the ever-growing population, expected reduction in the size of an average Bangladeshi household, outlook for housing demand remains extremely positive.

7. Price level:

Cement is almost a price inelastic product as it does not have any close substitute in the short run. So if it is required to build something, then the demand of cement is must, no matter whatever the price is. Moreover, the pricing of cement of various players in the industry are very close to one another. The model of industry competition has led to a remarkable stability in cement prices in recent years, encouraging greater demand.

8. Fiscal incentives and development plans:

Fiscal incentives and development plans helps to continue boosting cement demand. Fiscal incentives granted by the Government have provided boost to housing demand. Additionally, the budget of Bangladesh is also emphasizing on ADP (Annual Development Plan) which includes developing the roads and contractions, schools, hospitals etc, which will increase the demand for cement.

9. Business opportunities:

Bangladesh is also providing incentives for the foreign investors (EPZ). While construction activity and housing market have attractive returns on investment, encourage the entry of investors and construction companies. This can be a positive determinant of the demand of cement.

10. Seasonality

Bangladesh cement industry is known for its seasonality which can be as high as 50%. Cement demand declines during the monsoons due to a slowdown in construction activities. On the other hand, though the yearly capacity of the industry is saturated with overcapacity, market demand gets matched or cross the effective capacity during the first 5 to 6 months of the year.

11. Competition

In cement industry there is an intense competition among players regarding price due to homogeneous product. So, if the price of the imported cement decreases, then the demands of local cement will decreases and vice-versa.

12. Price of related goods:

There is no "Substitute" for Cement. Steel can be used in construction but in limited extent due to its high cost. On the other hand, in rural areas of the country that may use "quincha" (a mixture of straw and mud), but it cannot be matched with the quality of cement.

13. Taxes and Tariffs

The multinational cement companies are at an advantage because they import their own clinker. They just need to pay the import duty and taxes. They also have an advantage as the government allows them to import at a very low cost if the work is done for the government. But the local companies have to pay the import duty and also the price of the clinker. For this reason, the price of local cement is higher than the imported cement. Thus the demand for local cement falls.