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| India Infoline Sector Reports | Wed, 14-Jan-2004 11:24:07 IST (GMT+5:30) | |
| Cement | ||
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Indian Cement Industry - An Overview Cement is the preferred building material in India. It is used extensively in household and industrial construction. Earlier, government sector used to consume over 50% of the total cement sold in India, but in the last decade, its share has come down to 35%. Rural areas consume less than 23% of the total cement. Availability of cheaper building materials for non-permanent structures affects the rural demand. Demand for cement is linked to the economic activity in any country. Broadly, it can be categorized into demand for housing construction (homes, offices etc.) and infrastructure creation (ports, roads, power plants etc). The real driver of cement demand is creation of infrastructure, hence cement demand in emerging economies is much higher than developed countries where the demand has reached a plateau. In India too, the demand for cement will be affected by spending on infrastructure (including housing). With the boost given by the government to various infrastructure projects, road network and housing facilities, growth in the cement consumption is anticipated in the coming year. The favourable housing finance environment is expected to fulfil the vast housing requirements, both in rural and urban areas. The increase in infrastructure projects by the government coupled with the construction of the Golden Quadrilateral and the North-South and East-West corridor projects have led to an increase in consumption of cement. This increase is expected to continue in the future. The reduction in import duties is not likely to affect the industry as the cement produced is at par with the international standards and the prices are lower than those prevailing in international markets.
Where Is It Heading ? Cement is a typical cyclical industry, characterised by the boom-and bust syndrome. A huge potential market and rapid growth in the early stages lead to a surge in interest and a flurry of research. The projected growth rates point to a lucrative market. The buoyant markets and huge profits raked in by players tempt more players into the market. Capacities increase in excess of demand and a glut in capacity is created. Competition increases, prices fall and margins come under pressure. Capacity addition comes to a halt; weaker players shut shop or sell off to larger ones. Demand catches up and the cycle is repeated all over again. Perhaps, of all the cyclical industries, the Indian cement industry exhibits this boom-and-bust cycle most visibly. Consider the following: Temptation A huge potential market, easy availability of raw material and cheap labour leads to a flurry of activity and a surge in interest. The easiest way to estimate the potential that exists is the per capita consumption of cement, which is abysmally low in India at 82 kgs as against a world average of 255 kgs and the Asian average of 200 kgs. Although the growth of the industry depends more on the level of consumer spending rather than on the per capita consumption, nevertheless, it serves as an easy benchmark to estimate the potential that exists. Fuel to Fire The projected growth rates in demand (based on the potential per capita consumption growth or other demand drivers like the expected GDP growth rate) fuels stock market rallies. Consider the boom in cement stocks in 1994. Every cement company was attracting valuations it never dreamt about. Scarcity induced by lower capacities and to a large extent on non-availability of power, drove cement prices to the hilt. The kind of money minted by most cement companies as well as investors in that period made strategists plan enormous increases in capacity. This explains why capacity creation starting 1994, was so enormous. The Rush The amount of profits being raked in tempts more players to enter the industry. Contagious enthusiasm sweeps the industry and suddenly there is a glut of new players. Capacities start increasing at a rate greater than the demand growth rates. A scenario of excess supply to demand becomes imminent. Average annual capacity addition during the three-year period 1994-95 to 1996-97 was 8.33mn tons at 86.4mn tons, while that for the five years till 1994-95 was just 3.3mn tons. The capacity further increased to 104.51mn tons in 1998-99 and reached 130mn tons in 2001-02. In FY02 the production increased by 9.39% at 102.4mn tons from 93.61mn tons being produced the previous year. At present the annual capacity is around 135mn tons. The Anguish With competition increasing and growth in supply exceeding demand growth, prices begin to fall. This is also the time when players realize that greenfield capacity addition would be to their own detriment. Consolidation within the industry starts. Most of the players weakened during the excess supply induced recession sell off to larger and stronger players. Hostile takeovers are also witnessed during this period as the only way to expand is by takeovers. The slew of takeovers in the last two years culminating in Gujarat Ambuja taking a stake in ACC, the largest cement company in India bears ample testimony to this fact. Government Policies Government policies have affected the growth of cement plants in India in various stages. The control on cement for a long time and then partial decontrol and then total decontrol have contributed to the gradual opening up of the market for cement producers. The stages of growth of the cement industry can be best described in the following stages: Price and Distribution Controls (1940-1981) During the Second World War, cement was declared as an essential commodity under the Defence of India Rules and was brought under price and distribution controls which resulted in sluggish growth. The installed capacity reached only 27.9 MT by the year 1980-81. Partial Decontrol (1982-1988) In February 1982, partial decontrol was announced. Under this scheme, levy cement quota was fixed for the units and the balance could be sold in the open market. This resulted in extensive modernization and expansion drive, which can be seen from the increase in the installed capacity to 59MT in 1988-89 in comparison with the figure of a mere 27.9MT in 1980-81, an increase of almost 111%. Total Decontrol (1989) In the year 1989, total decontrol of the cement industry was announced. By decontrolling the cement industry, the government relaxed the forces of demand and supply. In the next two years, the industry enjoyed a boom in sales and profits. By 1992, the pace of overall economic liberalization had peaked; ironically, however, the economy slipped into recession taking the cement industry down with it. For 1992-93, the industry remained stagnant with no addition to existing capacity. Government Controls The prices that primarily control the price of cement are coal, power tariffs, railway, freight, royalty and cess on limestone. Interestingly, all of these prices are controlled by government. Coal The consumption of coal in a typically dry process system ranges from 20-25% of clinker production. This means for per ton clinker produced 0.20-0.25 ton of coal is consumed. This contributes 35-40% of the production cost. The cement industry consumes about 10mn tons of coal annually. Since coalfields like BCCL supply a poor quality of coal, NCL and CCL the industry has to blend high-grade coal with it. The Indian coal has a low calorific value (3,500-4,000 kcal/kg) with ash content as high as 25-30% compared to imported coal of high calorific value (7,000-8,000 kcal/kg) with low ash content 6-7%. Lignite is also used as a fuel by blending it with coal. However this process is not very common. Electricity Cement industry consumes about 5.5bn units of electricity annually while one ton of cement approximately requires 120-130 units of electricity. Power tariffs vary according to the location of the plant and on the production process. The state governments supply this input and hence plants in different states shall have different power tariffs. Another major hindrance to the industry is severe power cuts. Most of the cement producing states like AP, MP, experience power cuts to the tune of 25-30% every year causing substantial production loss. Infrastructure To reduce uncertainty relating to power, most of the leading companies like ACC, Indian Rayon, and Grasim rely on captive power plants. A few companies are also considering power-generating windmills. Limestone This constitutes the largest bulk in terms of input to cement. For producing one ton of cement, approximately 1.6 ton of limestone is required. Therefore, the cement plant location is determined by the location of limestone mines. The major cash outflow takes place in way of royalty payment to the central government and cess on royalties levied by the state government. The total limestone deposit in the country is estimated to be 90 billion tons. AP has the largest share -- 34%, Karnataka 13%, Gujarat 13%, M.P 8%, and Rajasthan 6.5%. The plants near the limestone deposit pay less transportation cost than others. Transportation Cement is mostly packed in paper bags now. It is then transported either by rail or road. Road transportation beyond 200 kms is not economical therefore about 55% cement is being moved by the railways. There is also the problem of inadequate availability of wagons especially on western railways and southeastern railways. Under this scenario, manufacturers are looking for sea routes, this being not only cheap but also reducing the losses in transit. Today, 70% of the cement movement worldwide is by sea compared to 1% in India. However, the scenario is changing with most of the big players like L&T, ACC and Grasim having set up their bulk terminals. Infrastructure for Future The consumption of cement is determined by factors influencing the level of housing and industrial construction, irrigation projects, roads and laying of water supply and drainage pipes etc. The level and growth of GDP and its sectoral composition, capital formation, development expenditure, growth in population, level of urbanization, etc, in turn, determine these factors. But the domestic demand for cement is mainly from the housing activities and infrastructure development. The government paved the way for the entry of the private sector in road projects. It has amended the National Highway Act to allow private toll collection and identified projects, bridges, expressways and big passes for private construction. The budget gave substantial incentives to private sector construction companies. Ongoing liberalization will lead to an increase in industrial activities and infrastructure development. So it is hoped that Indian cement industry shall boom again in near future. Incentives in States Most state governments, in order to attract investments in their respective states, offer fiscal incentives in the form of sales tax exemptions/deferrals. In some states, this applies only to intrastate sales, like Madhya Pradesh and Rajasthan. States like Haryana offer a freeze on power tariff for 5 years, while Gujarat offers exemption from electric duty.
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