|
The Indian cement industry with a total capacity of about 190 m tonnes in FY08 is the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity, the balance capacity still remains pretty fragmented.
|
|
Despite the fact that the Indian cement industry has clocked production of more than 100 m tonnes for the last five years, registering an average growth of nearly 9%, the per capita consumption of around 150 kgs compares poorly with the world average of over 260 kgs and more than 450 kgs in China. This, more than anything underlines the tremendous scope for growth in the Indian cement industry in the long term.
|
|
Cement, being a bulk commodity, is a freight intensive industry and transporting cement over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. While the southern region always had excess capacity in the past owing to abundant availability of limestone, the western and northern region are the most lucrative markets on account of higher income levels. However, with capacity addition taking place at a slower rate as compared to growth in demand, the demand supply parity has been restored to some extent in the Southern region for the medium term. Considering the pace at which infrastructural activity is taking place in different regions, the players have lined up expansion plans accordingly.
|
|
Given the high potential for growth, quite a few foreign transnationals have been eyeing the Indian markets and are planning to acquire domestic companies. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has acquired stake in domestic companies Ambuja Cements and ACC and is increasing its stake gradually to gain full control. After acquiring stake in big companies, transnationals eyed median capacity producers. Italcementi acquired 100% stake in Zuari Cement and 95% stake in Shree Vishnu. Cimpor, the Portugese cement manufacturer, acquired Grasim’s stake (53.63%) in Shree Dig Vijay. However, it must be noted that the transnationals will find the going tough since cement is a game of volumes and with the median capacity of fragmented players, the transnationals will have to acquire capacities piecemeal and this route is fraught with a lot of uncertainties. The global players put together account of quarter share of the domestic market. Further, turning around few of the companies at a time when the cycle is at its peak would be a difficult task.
|
| Supply |
The demand-supply situation is tightly balanced with the latter being marginally higher than the former.
|
| Demand |
Housing sector acts as the principal growth driver for cement. However, in recent times, industrial and infrastructure sector have also emerged as demand drivers for cement.
|
| Barriers to entry |
High capital costs and long gestation periods. Access to limestone reserves (principal raw material for the manufacture of cement) also acts as a significant entry barrier.
|
| Bargaining power of suppliers |
Licensing of coal and limestone reserves, supply of power from the state grid and availability of railways for transport are all controlled by a single entity, which is the government. However, now days producers are relying more on captive power, but the shortage of coal and rising fuel prices remain a concern.
|
| Bargaining power of customers |
Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. However, things are changing and few brands have started commanding a premium on account of better quality perception.
|
| Competition |
Due to large number of players in the industry and very little brand differentiation to speak of, the competition is intense with players resorting to expanding reach and achieving pan India presence. |
|
| TOP |
|
During FY08 production, consumption and capacity addition clocked 8%YoY growth. India owing to its locational advantage has been catering to the cement requirements of the Middle East and the South East Asian nations. However, the exports were curtailed in FY08 in order to satisfy the domestic demand and contain inflation.
| |
While demand growth stood at 8% YoY, average industry cement realisations (average of price per bag of cement published in the monthly CMIE) were higher by about 6% YoY. This was owing to slowdown in demand as inflationary situation in the economy and the rising cost of funds led to a lull in the real estate sector and construction activity. Further, the announced capacities have started coming on stream and the same have started exerting pressure on realisations.
| |
In the budget, the excise duty on the bulk cement was revised to Rs 400 per tonne or ad valorem duty of 14% which ever is higher, while that on clinker was hiked by Rs 100 per tonne to Rs 450 per tonne. While the government refrained from cutting excise duty and countervailing duties, it increased budgetary allocation for roads under NHDP. The government has continued to provide a fillip to the infrastructure sector in the budget.
|
|
| TOP |
|
The industry is likely to maintain its growth momentum and continue growing at around 8% to 10% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main drivers of growth for the industry.
| |
Recently, demand has surpassed supply, resulting in healthy cement prices across the country. However, this scenario is likely to reverse as the industry has lined up huge capacity expansion plans. For the industry, fresh capacities announced till date will add up 60 to 70 MT to the existing capacity (190 MT), and are expected to go on stream by FY10. As the capacities become operational (this has started taking place) and utilization levels increase, supply may once again outstrip demand putting downward pressure on margins. Having said that, temporary relief may be provided if there are delays in any of the proposed expansion plans.
| |
While infrastructure spending has been a boon, there was also a strong cushion from the steady growth of the construction sector (read housing). However, recently the demand has slowed down as real estate and construction activities have taken a back seat with the hardening of interest rates. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 75%-80% of the country’s cement. If this support wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the hike in prices of coal and petroleum products could impact cement companies’ margins.
| |
The budget measures such as increasing excise duties have proved to be futile and in the future too, we believe that it is the market dynamics that will determine these variables.
|
|
| TOP |
