The rise and rise of cement
Cement got back its mojo in FY19; this year it’ll rake in the moolah
India’s cement industry, the second-largest in the world, is set to cement its pricing power locally after a prolonged phase of capacity overhang that had prevented attempts at increasing realisations. Last fiscal year was favourable for the cement industry for several reasons. First, the industry clocked double-digit volume growth for the first time in the past nine years. Second, even capacity utilisation, which reached close to 71%, improved 5% on year — the highest in the past seven years. Third, cement prices climbed about 2% in FY19. Fuel costs also declined, in lockstep with crude prices.
Cement manufacturing companies too have been ramping up capacity on the back of expected demand. For instance, UltraTech Cement has got environment ministry’s nod for Rs 2,500 crore project in Andhra Pradesh. Under the project, the company will set up an integrated cement plant in Kurnool district with a clinker capacity of 4 million tonne per annum (MTPA), 6MTPA of cement, 60MW of captive power plant and 15MW of waste heat recovery-based power unit.
Similarly, Dalmia Bharat Cement (DCBL) announced that it is investing Rs 2500 crore in Odisha for setting up two manufacturing units in Rajgangpur and Cuttack. DCBL has proposed to set up a new unit of 2.25MTPA cement manufacturing plant and 3MTPA clinker manufacturing capacity at Rajgangpur. Once commissioned, the company’s total capacity in Rajgangpur will increase to 6.25MTPA in cement and 5.9 MTPA in clinker manufacturing.
It is natural that the industry expects to build on the achievements of FY19 and enhance realisations, by 2-5%. In each of the next five years, the Central government is expected to build about 6,000km length of roads. Besides this, the low-cost housing segment is also likely to boost cement demand. There is a possibility that the government’s investments in infrastructure and its focus on the pace of execution should help sustain cement prices within a favourable range.
That’s the way the cookie crumbles
However, for some time now, cement prices have been on the rise. This has not found favour with real estate developers who are already reeling under rising inventory and increasing cost of construction. India is currently focused on infrastructural development and 100 smart cities to aid economic growth. These development measures and government initiatives like Housing for All are the reasons for increase in construction activities leading to rise in cement demand. There are two primary reasons for the rising price of cement: growing real estate demand and logistical factors which affect supply.
“When the prices of pet coke, freight and fuel are higher, the same is passed on to cement prices. Apart from these factors, what contributes to the increase in demand and price of the cement is the low threat from substitutes,” says Samyak Jain, director, Siddha Group.
Rohit Poddar, MD, Poddar Housing and Development, believes that there is no economical or fundamental reason for the rise in cement prices and it is a result of cartelisation by cement companies. “In fact, demand has slowed down but prices continue to remain high because of the aggressive capacity utilisation of companies to moderate the effects of price hike in future,” he adds.
According to popular opinion, cement price hikes have been more pronounced in the South. According to Ashok Mohanani, chairman, EKTA World, “The bigger cities of South are where the cement price hike is most noticeable. For example, in the last few months to March 2019, the price of cement soared by Rs 77 per bag in Hyderabad, Rs 62 per bag in Chennai and Rs 52 per bag in Bengaluru. This price hike has been determined by a diversity of reasons. Price rises in metro cities are due to moderate growth in demand, this is an indication that margins are not healthy, and one can anticipate this to continue for a while.”
Justifying the rise in prices, Ujjwal Batria, COO, Dalmia Cement (Bharat), says, “There are various factors that go into the pricing of product such as taxes, cost of transportation, raw material cost and other indirect expenses. The rate of GST for the cement sector is 28%. In addition, cyclic or seasonal demand-supply factors even out prices in the long run. Cement prices rise due to demand pull. For us, cement prices have fallen in most markets in FY19 between 2.5-4.5% on a Y-o-Y basis. We are dependent on the government’s push on the housing sector, rural economy and continued focus on the roads and railways.”
The company has invested in low carbon technologies that have since translated into enhanced resource and energy efficiency. It progressively increased the proportion of environment-friendly blended cement within its product mix to ~80%, reducing the company’s carbon footprint while addressing waste disposal issues of other industries.
Understanding that cement is a volatile commodity, developers are smart enough to start procuring ahead of the start of the project. Shivamurthy KB, associate VP, projects, Adarsh Developers, says, “It is imperative that developers consider market data of last three years to determine an overall price trend. They can also depend on recent price trends to understand the price volatility based on the budget plan. Another way is to see the forecast for next three years by looking at factors likely to affect the market’s supply chain to figure out the best time to purchase. On our part, we also check the availability of products from each supplier and look at back-order times.”
On the other hand, one South India based company attempts to address inefficiencies in vendor management and bid management processes when buying cement. Rakesh Reddy, director, Aparna Constructions & Estates, says, “We have a continuously evolving system of best practices that is designed to increase efficiency and mitigate risk. One of our key principles of procurement is the use of automation. This helps manage the aggregation and analysis of incoming data such as price volatility. We have created a smart system that can quickly determine cost savings and opportunities. As a rule, we also try to engage with as many bidders as possible to ensure diligence and widen our pool of suppliers.”
Poddar believes that if one is an established player in the market, then one can form strategic partnerships with cement companies to procure.
Reddy says, “Currently, cement supply assurance is one of the largest and fastest growing procurement risks in the real estate sector. To manage this risk while maintaining the highest benchmarks of construction quality, we have implemented backward integration. This entails vertical integration in which Aparna Constructions has set up its own building material facilities to ensure a more reliable or cost-effective supply of inputs. It allows for more efficiency and control of the development ecosystem, and thus shields our customers from elevated costs.”
There are mainly three regular varieties of cement: OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement). PPC (with Fly ash) and PSC (with Slag) are both blended cements and considered suitable for all types of buildings.
OPC is used to make almost all concrete due to its strength and durability factors. It is used to make pavements, floors, bridges, mortar for joining masonry and plaster to give perfectly finished walls. A uniform and fine blend of Portland and Pozzolana produces a cement called Portland Pozzolana Cement (PPC) and is generally used in high rise buildings, underwater concrete structures and in mass concrete constructions. Quick Setting Cement, as the name suggests, is used in constructing piers for bridges.
The demand for cement is in the real estate sector, infrastructure and industry expansion sectors. Out of these, the major demand is from the real estate sector. The real estate sector and cement industry are closely related and any hike in cement prices will directly affect the real estate sector.
Shivamurthy says that regular price hikes of cement has crippled the real estate sector. “It has also increased construction cost. The developers’ apex body, CREDAI, believes that a cement lobby is active and has demanded an intervention from the government. Several developers also feel that price hikes will play spoilsport for customers as, ultimately, they will feel the brunt of this hike. Even though the real estate sector is witnessing a slowdown, residential demand continues to stay steady and growing as people need a house to live in. However, this matter is being dealt by developers with dealers and best prices are being arrived at for major projects to fit into their budget.”
Poddar believes that as far he knows most developers haven’t forged any partnership with manufacturers. He adds, “Registered cement companies seek higher prices from developers considering the amount of consumption. Cement producers have a perception that developers get a good margin per square foot but they need to revisit the facts when it comes to the affordable sector. Cement companies may have a strategic relationship with developers but there’s no partnership between cement companies and developers.”