Cement Sector Analysis Report

• The Indian cement industry is the 2nd largest market after China. It had a total capacity of about 300 m tonnes (MT) as of financial year ended 2010-11. Consolidation has taken place with the top three players alone controlling almost 35% of the capacity. However, the balance capacity still remains quite fragmented.
• Despite the fact that the Indian cement industry has grown at a commendable rate in the last decade, registering a growth of nearly 9% to 10%, the per capita consumption still remains substantially poor when compared with the world average. While China registered the highest per capita cement consumption in 2010 of about 1,380 kg, India stood much lower at 230 kg. This 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 it 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. With capacity addition taking place at a faster rate as compared to demand, prices have remained southbound, especially in the last one year. Nevertheless, considering the government’s thrust on infrastructure, long term demand remains intact.
• Given the high potential for growth, quite a few foreign transnational companies have displayed their interest in the Indian markets. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has increased its stake in domestic companies Ambuja Cements and ACC to gain full control. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

• Supply
• The demand-supply situation is high skewed with the latter being significantly higher.
• Demand
• Housing sector acts as the principal growth driver for cement. However, recently industrial and infrastructure sectors have also emerged as demand drivers.
• Barriers to entry
• High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier.
• Bargaining power of suppliers
• Licensing of coal and limestone reserves, supply of power from the state grid etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile 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
• Intense competition with players expanding reach and achieving pan India presence.

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• During financial year 2010-11 (FY11), the cement industry added nearly 28 MT over and above the 60 MT added in the previous year taking the total capacity to nearly 300 MT. However, cement demand during the year grew at a paltry rate of 5.3%, the lowest since 2003-04. A significant slowdown was witnessed following the first quarter of FY11 mainly on account of the several hikes in key lending rates by the Reserve Bank of India aimed at curbing the inflationary pressures. The credit crunch resulting from the monetary tightening impacted real estate, infrastructure and other construction projects. Prolonged monsoons and logistical constraints further dampened the construction work. As a result, average industry capacity utilisation fell as low as 70%. The impact was even worse in the southern region, which witnessed the highest capacity additions.
• The low cement demand severely affected average industry realisations (average price per bag of cement). Additional capacities coming on stream further intensified the oversupply situation. On the cost front, rising input and fuel costs severely hurt the margins of cement players. Export markets also remained sluggish due to the slowdown in the global economy, and particularly the sagging construction activity in the Gulf region.

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• The growth of the Indian economy has slowed down in recent times on account of the rising inflation, high interest rates, high prices of commodities and fuels. The growth prospects of the cement industry are closely linked to the growth of the overall economy and the real estate and construction sector in particular. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60-70% of the country’s cement. If the slowdown in real estate persists for an extended period, it would impact the growth in consumption of cement. In such a case, the small and medium-sized cement players would be the worst hit.
• Despite the overcapacity situation weighing on the cement industry, several major capacity additions are expected in the next few years. Hence, the supply overhang is likely to persist for at least 2-3 years. This will keep a constant pressure on cement realisations. On the demand front, the cement industry is likely to maintain its growth momentum and continue growing at around 8% to 9% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main growth drivers.
• In the Union Budget 2011-12, the government restructured the excise duty on cement in a way that would effectively increase the tax incidence on the cement industry. However, certain initiatives chalked out to benefit the user industries would in turn boost demand for cement. Custom duties on key inputs such as petcoke and gypsum were also reduced which would provide some marginal relief against the rising costs of inputs.

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Related Links for Cement Sector
Quarterly Results | Sector Quote | Over The Years