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Report – Cement Industry

Is there enough demand to balance the cement supply? Will the projected growth materialise? Or will the cement industry have to take drastic measures to deal with the situation? This report by Yogender Malik presents some insights.
Although Indian cement industry is consolidated to a great extent with five leading players control 46% of the installed capacity but the balance capacity is still fragmented. Owning to cement’s bulky nature, making it freight intensive industry and transporting cement over long distances becomes uneconomical. This has resulted in cement being largely a regional industry. 
Indian cement industry is divided into five chief regions – north, south, west, east and the central region. The annual cement despatches for 2008-09 recorded a growth of 7.91% at 180.95 tonne, against the figure of 167.68 tonne during 2007-08. India also reported total cement production of 181.35 million tonne during 2008-09 fiscal, up 7.74% from 168.31 during 2007-08.
While the industry has been already troubled by the rise in input costs, it is under government pressure that restricts it from passing on the increased costs to the consumers. Yes, input costs have come down with imported coal at $70 a tonne against the high of $200 a tonne last year. At present, the cement sector is in a relatively better position than what it was earlier. Cement companies are now looking for more cost cuts as well as increasing efficiencies in anticipation of tough times. Although prices have increased slightly after November due to the sudden demand but the growth rate is nowhere near what the industry had anticipated. A growth rate of more than 11% was expected in the ongoing Five Year Plan but 2008 registered only 8%.
Indian cement industry is expected to add around 40 million tonnes of capacity in 2009. However, there have been doubts whether there will be sufficient demand to take in this supply. Given this scenario, it is only natural that cement makers would go for cost cutting measures while also improving operational efficiencies. Many are now also looking at renewable energy sources.
Demand- supply mismatch
Given its rickety infrastructure and scores of upcoming projects, some of which in its initial phases and some on the tables of the bureaucrats, waiting approvals, without any doubts, there is a huge demand of cement in this vast country.
The capacity expansion by the cement companies was motivated by these ongoing and pipeline projects. The overall capacity increased to 210 million tonnes in FY2008-09 from 151 million tonnes in FY2004-05. That translates into a CAGR of 10% YOY. The average capacity utilisation and cement dispatches both maintained a steady growth. Total dispatches recorded 181 million tonnes during 2008-09 against 141 million tonnes in 2005-06.
Most players, large as well as small have expanded their installed capacities in the recent past. There was a capacity addition of 13.51 million tonnes in the last fiscal despite the slowdown. More than 75% of this (9.85 million tonnes) came through Greenfield projects. The remaining 3.66 million tonnes came through Brownfield projects. South India witnessed three Greenfield projects by the Madras cement, Chettinad Cement and Rain Commodities. Each has a capacity of two million tonnes. Note that consumption in this region was at 54.3 million tonnes in the previous FY. This is highest amongst all the four regions in the country.
The Expansions
Against all odds, the Indian cement industry went on a binge of expansions counting on the huge infrastructure projects. Incidentally, the industry is likely to add about 55-60 million tonnes of capacity in the next couple of years. Most of the big players would be adding capacity under their capital expenditure programmes.

[Read the following in this order: Manufacturer, Production (2008-09), Capacity (April 09), Capacity after proposed/ongoing expansion. (All figures in million tonnes)]

ACC: 21 – 22.4 – 29.4
Ambuja Cement: 18 – 18.3 – 24.3
Grasim Ind: 16.3 – 18 – 25.5
Ultra-Tech: 15.8 -19.5 – 23
India Cement: 9.1 – 10.7 – 13
Jaypee Group: 8 – 10 – 35
Shree Cement: 7.7 – 9 – 11.5
Century: 7.2 – 7.8 – 11.4
Madras Cement:  6.2 – 7 – 12
Birla Corporation: 5.2 – 5.7 – 10
Compiled from various press releases

Jaypee Cement leads the table on the back of its recently announced expansion of 25 million tonnes. Cement biggie ACC plans to add seven million tonnes taking its installed capacity to 29.5 million tonnes by 2011. Ambuja cement, Madras cement and UltraTech cement too are raising their capacity by 7.5, 6 and 5 million tonnes respectively.

Greenfield and Brownfield Expansions in 2009
Jan – March 2009
Dalmia Cement’s 2.3mtpa Cuddapah plant.
Kesoram 1.7 mtpa cement capacity expansion.
India Cements 1.5 mtpa Malkapur, AP plant.
Deccan Cements 1.1 mtpa AP plant.
JK Lakshmi Cement 0.5 mtpa plant.
Madras Cements 2mtpa plant at Ariyalur.

 

Apr- June 2009
JK Cement 3.5 mtpa Karnataka plant.
Orient Cement 1.6 mtpa Devapur, AP plant.
Grasim’s 4.4 mtpa Kotputli expansion.
OCL’s 2.0 mtpa Orissa plant
Chettinad Cement 2mtpa plant at Ariyalur.
Murli Industries 2.5mtpa Chandrapur plant.

Jul- Sep 2009
Lafarge’s 1.3 mtpa Sonadih plant to start
Dalmia Cements 2.3 mtpa Ariyalur plant to start
Zuari Cements 2.4 AP mtpa plant to start
Ambuja Cement’s 1.5mtpa Dadri plant to start
ACC’s 1.2 mtpa Bargarh plant to start

Oct- Dec 2009
JP Associates 3.0 mtpa HP plant to start
NCL Industries 1.5 mtpa AP plant to start
Raghuram Cement AP 2 mtpa plant to start
Andhra Cement 1 mtpa AP plant to start
Ambuja Cement 1.5 mtpa Panipat plant to start
Shree Cement 1.0 mtpa plant to start
ACC 3 mtpa Wadi, Kar plant to start
All data compiled from various press releases

Consistent emphasis by the Government on infrastructure development along with the real estate boom spurred this demand of cement in India. Also, in the coming years there could huge migration from villages to cities, which should result in a very healthy growth of cement industry in the short and medium term.
KK Kapila of Indian Building Congress told Construction Week India: “India is the second largest producer of cement in the world after China. India and China together account for 58% of the world’s cement consumption. It is a fact that the economic slowdown has caused a double digit decline in global cement consumption in the year 2008 and 2009 (15% in 2008 and 17% in 2009). But despite the economic slowdown, in the fiscal year 2008-09 India produced around 181 million metric tonnes of cement representing a growth of about 7.8% over the fiscal year 2007-08.” Thankfully the recession seems to losing its clutch on the economy and construction activities are again picking up in the country leading once again to a healthy growth rate of cement industry.
Oversupply?
The real estate sector, which consumes around 60% of the total demand, is under pressure since second half of last year and continues to do so. It has affected the overall demand of the cement. A score of projects are lying in initial stages and the construction has been stalled in and around all major cities of the country. Vinod Juneja, managing director, Braj Binani Group spoke to Construction Week India on the situation oversupply in the Indian cement industry. He says: “Sustained demand will help absorb the additional supply in the year. The Union Budget’s thrust in infrastructure development, encouragement of Public Private Partnership in various small, medium and large projects coupled with the demand for low cost housing in tier II and tier III cities will absorb the supply of cement.”
On huge capacity additions, Nikhil Mansukhani, Director of Man Infraprojects Ltd says: “As we all are aware of the huge investment coming up by the centre towards the infrastructure soon, the prices may see upward trends in long term, in case there is a short supply to fulfil the huge requirements. Moreover, growing momentum in consolidation amongst the cement manufacturers is expected to bring rationality in capacity addition. This would keep the cement prices favourable for the companies.”
Demand and supply seem to be evenly poised at this stage. However, with a lot of these capacities coming on-stream, the scenario is likely to undergo significant changes. While the industry has definitely gone for production cuts in some cases, capacity utilisation slipped to 92% in fiscal 2008-09 from 98% in the previous fiscal.
Prices
Price realization in Indian industry, which were on an all time high couple of years back are facing an up-hill task. So far the current peak season has maintained the support to the demand. But it is the most likely scenario that in coming next months there might be a price correction of Rs25-30/bag. Price cut may differ in different regions in the country by a variance of Rs5-8. In last three- five years period, cement prices have mostly been rising, but last few months have seen a reversal of this trend and prices have come down in few regions. With the pipeline capacities coming on-stream, it is expected that price may decrease.

Table:- Average Cement Prices
Year       Average Prices ( Rs. per Bag)
2005-06  153
2006-07  188
2007-08  284
2008-09  240

Commenting on the cement prices, Mansukhani says: “Cement is one of the key construction materials as far as the real estate and infrastructure is concern, considering the current revival in the housing demand, there is a possibility of an increase in the demand for the cement in the near future. Any kind of price rise certainly will make impact on the housing industry by pushing up the prices upward. However, looking at the comfortable supply situation we don’t think any abnormal rise in the cement prices. Cement prices always seen ups and down along with the general economic trend in the past”.
On the issue of cement prices, Manoj Gaur, executive chairman of JP Associates says: “I have always been advocating that cement prices are a matter of a regional imbalances and I feel that even though prices might get a bit corrected during this two months up to September but I see fairly stable market from October onwards. But yes, a spurt in cement prices, I don’t think will come because the monsoon has been weak but in my opinion especially in northern India, central India, eastern India prices should be stable after October also.”
Government’s role
Almost all of the cement manufacturers are of the opinion that Government is doing little to promote the cement industry. One of the top executive from a New Delhi based Cement Company told Construction Week India on condition of anonymity: “Government should focus more aggressively on infrastructure development. It must promote concrete roads instead of bitumen roads. The maintenance cost of concrete roads is quite low compared to the bitumen roads, besides improving the road conditions, it will spur the demand of cement”.
Another common complaint by Indian manufacturers is that Indian companies pay excise duty while imported cement is exempted from Countervailing Duty. The CVD must be re-imposed on imports to create a level playing field.
Coal supply at linkage price to the industry was reduced to 75%. Coal India has modified the commitment in the fuel supply agreement to 45% at linkage rates. It is important to note that some of cement plants are completely dependent on imported coal.
Our take
It is difficult to estimate when Greenspan’s “Green Shoots” will finally start to appear and the world will come out of the recession and construction sector will gather its earlier pace, but in light of all the factors the medium and long term demand in the country is likely to increase, as the planned infrastructure demand and rapid urbanization in the country will need huge quantity of this all important building material. But with a huge capacity going on stream in the current and next year, it is likely that with these capacity additions, few of the producers will be under pressure on margin front and prices in the short and medium term are likely to remain stable or go down a little.

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