Cement Sector Analysis Report 

• The Indian cement industry is the second largest market after China. It had a total cement production capacity of about 425 million tonnes (MT) as of September 2017. Cement is a cyclical commodity with a high correlation with GDP.
• The demand for cement in real estate sector is spread across rural housing (40%), urban housing (25%) and construction/infrastructure/industrial activities (25%). While the rest 10% demand is contributed by commercial real estate sector.
• Cement demand is expected to reach 550-600 Million Tonnes Per Annum (MTPA) by 2025. To meet the rise in demand, cement companies are expected to add 56 million tonnes capacity over the next three years, till 2019.
• Moreover, the per capita consumption of cement in India still remains substantially low at less than 200 kg when compared with the world average which stands at about 500 kg. In case of China, it is over 1,000 kg per head. 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. The Southern region of India has the highest installed capacity, accounting for about one-third of the country's total installed cement capacity.

• Supply
• The demand-supply situation is highly skewed with the latter being significantly higher.
• Demand
• Housing sector acts as the principal growth driver for cement. However, 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, many producers are relying more on captive power.
• Bargaining power of customers
• Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. Cement is sold in two segments – trade and non-trade. Trade cement is the one sold to the dealers. Non-trade cement is sold directly to the consumers, mainly institutional buyers. Trade cement sells higher compared to non-trade. As such, companies that have a strong distribution network and retail presence tend to have better cement realisations.
• Competition
• Intense competition with players expanding reach and achieving pan India-presence. The industry is a lot more consolidated than a couple of decades ago with a few large players controlling substantial market share.

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• The production during the year was 280 million tonnes against the capacity of over 375 million tonnes resulting in an average capacity utilization of around 75%. According to Department of Industrial Policy and Promotion (DIPP) reports, while the industry had witnessed a growth of over 5% in the first half of the fiscal, overall for the year was a negative growth of 1.2% caused partially by demonetization exercise done in November 2016.
• The poor growth in cement demand is also attributable to slower progress in infrastructure projects and low off-take from housing and industrial user segments. While rural demand was affected by less-than-normal monsoon, the demand from real estate market in urban areas was also poor because of frail market conditions. Cement demand from Industrial capital expenditure was adversely affected due to existence of excess capacities across various industrial sectors. The supply side on the other hand continued to reflect over-capacity leading to lower capacity utilization levels by cement companies. Drop in commodity prices especially coal however helped cement companies in rationalizing their cost of production.

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• Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. If the rate of growth of consumption remains low at 5-6%, the existing capacity would be sufficient to meet the cement demand for the next few years.
• Higher government spending on infrastructure and housing, and rising per capita incomes will be key growth drivers for the cement industry. There have also been positive moves on the policy front, in areas related to ease of doing business, promoting start-ups, rationalising the tax structure and administration, and opening up more areas for foreign investment through the automatic route. The government is substantially stepping up infrastructure spending.
• From a long-term point of view, overall pick-up observed in the infrastructure spending by the Government and downward trend in the interest rates is expected to revive the demand across sectors. The 7th Pay Commission is expected to aid in housing demand. Government thrust on affordable housing for realizing its vision of “Housing for All” by 2022 and Smart City program should also help in demand growth for cement. The rate of new capacity additions has also slowed down considerably. Therefore, the outlook for the cement sector looks better.
• As per Crisil Report, Cement demand is expected to increase by 5.0-5.5% y-o-y in FY18 on back of increased spends on roads and railways, push towards affordable housing by central government, materialization of pent-up demand, particularly in rural housing and low base.
• Over a five-year period, cement demand is expected to increase at 6-7% CAGR, led by revival in government spending in housing (especially affordable housing), marginal uptick in private housing, and fast growth in infrastructure spends (especially urban infrastructure, road, and irrigation). At regional level, eastern states followed by central and north regions would see healthier growth in demand over a low base as the state governments sharpen focus on development.

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