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| India Infoline Sector Reports | Wed, 14-Jan-2004 11:24:07 IST (GMT+5:30) | |
| Cement | ||
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Nature of the Industry Installed Capacity India is the world’s second largest cement producing country after China. The industry is characterized by a high degree of fragmentation that has created intense competitive pressure on price realizations. Spread across the length and breadth of the country, there are 120 large plants belonging to 56 companies with an installed capacity of around 135mn tons as on March 2002. Group-wise Installed Capacity
L&T, with 16 MT, accounts for 11.88% of the total cement production capacity in the country. It is followed by ACC, with 15MT, accounting for 11.15%. Grasim Industries with a production capacity of 13mn ton has 9.66% of the total cement production. Gujarat Ambuja has a production capacity of 12.5mn tons (including its plant in Chandrapur, Maharashtra). It took a 14.4% stake in ACC and together they account for 27% of the total cement production capacity in the country. Grasim Industries has 10% stake in L&T, and together they account for 29% of the total cement production capacity. Statewise Capacity As cement is a low
value commodity, freight costs assume a significant proportion of
the final cost. Transporting costs render the prices of cement in
distant destinations uncompetitive. For instance, it is financially
infeasible to transport cement by road over 250 kms. Railways are
mostly used to transport cement over longer distances. However, its
bulky nature and infrastructure bottlenecks render even rail
transport unviable over very long distances (that is why Madras
Cements or India Cements, located in the south, can hardly make a
difference to the fortunes of west-based companies like Gujarat
Ambuja). Therefore, manufacturers tend to sell cement at the
nearest market first and sell in distant markets only if additional
realization is greater than freight costs incurred. This highlights
the regional nature of the cement industry. The Indian cement industry has to be viewed in terms of five regions:- North (Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K and Uttranchal); West (Maharashtra and Gujarat); South (Tamil Nadu, Andhra Pradesh, Karnataka, Kerala, Pondicherry, Andaman & Nicobar and Goa); East (Bihar, Orissa, West Bengal, Assam, Meghalaya, Jharkhand and Chhattisgarh); and Central (Uttar Pradesh and Madhya Pradesh).
South accounts for 33.03% of cement production capacity of the country, with Andra Pradesh accounting for 15.27% of the total production capacity of India. It has an installed capacity of around 20mn tons of cement and ranks first in the country, followed by Tamil Nadu with 9.94% of the total production capacity. North accounts for 18.02% of the total production capacity, with Rajasthan at 12.55% of the total production capacity of the country. West accounts for 16.85% of the total production capacity. Maharashtra and Gujarat have production capacity of 6.89% and 9.96% respectively. East and Central Regions account for 16.33% and 15.77% of the total production capacity of the country respectively. Trade between these regions is on a very low scale mainly because of the transportation bottlenecks and uncompetitive cost of transportation. This apart, there are other factors that determine the location of a cement plant. Proximity to limestone deposits, availability of coal and power and the markets the plants cater to, are some of the critical factors that determine the viability of a cement plant. Seven Clusters Cement and its raw materials namely coal and limestone, are all bulky items that make transportation difficult and uneconomical. Given this, cement plants are located close to both, sources of raw materials and markets. Most of limestone deposits in India are located in Madhya Pradesh, Rajasthan, Andhra Pradesh, Maharashtra and Gujarat, leading to concentration of cement units in these states. This has resulted in ‘clusters’. There are seven such clusters in the country and account for 51% of the cement capacity. There is a trade-off between proximity to markets and proximity to raw materials due to which some cement plants have been set up near big markets despite lack of raw materials. Exports The cement sector is
relatively insulated from international markets. This is largely
due to inadequate infrastructure to carry on international trade.
Being a very bulky item, international trade is very limited and
only between neighbouring states. This is amply borne out by the
fact that cement accounts for not more than 0.20% of total world
exports. Although India has been consistently exporting cement in
the past, the volume of exports took a beating after the Southeast
Asian crisis. From a peak of 2.68mn tons in 1997-98, cement exports
from India have slid down to 2.06mn tons in 1998-99. However the
situtation has improved gradually. In FY02 the exports were 2.77mn
tons as against 2.37mn tons in FY01, an increase by 16.87%. Capacity Utilization The installed capacity, which was 62 MT p.a. in 1993, has increased to 134.59 MT in March 2002. The all-India average capacity utilization of cement plants is at 85%. The fall in utilization levels has been on account of severe shortages of key raw materials such as power, coal and rail wagons. Reasons for Full Capacity Utilization vis-à-vis Demand The basic reason for not keeping production low or reducing production and inter-alia utilization is due to the incidence of high fixed costs. The cement units continue to operate at rated capacities to cover their costs. This can be gauged by the fact that most units had installed captive power generation facilities to reduce dependence on the grid. Cost Components Energy (including the landed cost of coal which is about 26%) and freight (15%) are the major cost components. Interest and depreciation account for 25-30% of costs, depending on the age and capital structure of the plant. Another important cost element is taxes levied by the government. Most of the companies prefer to maintain their capacity utilization and hence, sell cement in the nearest market to increase their net realization. However, if there is less demand in adjacent states, cement will inevitably have to be transported over longer distances. This squeezes margins. Key Indicators of Profitability Given the cost structure, the key indicator of the cement sector profitability is the cement prices. The entire sector valuations will be driven by outlook on cement prices. Given the role the government has in fixing key input costs, it is very difficult for a company to minimize costs beyond a point. The key driver of profitability is cement prices, which fluctuate depending on outlook on demand-supply gaps. Per Capita Cement Consumption Per capita cement consumption in India is 82 kgs against a global average of 255 kgs and Asian average of 200 kgs. Consolidation A peculiar factor of the cement sector has been the high degree of interest that is being shown by international cement giants in acquiring domestic companies. Consolidations has become a prominent activity as both domestic and international companies try to consolidate their positions in one of the most promising cement markets worldwide. Lafarge has already acquired 4.5mn tons capacity in India through acquisition. Among the others that are believed to be eyeing domestic companies include Holderbank and Cemex.
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