1. INTRODUCTION
The cement sector notably plays a critical role in the economic growth of the country and its journey towards conclusive growth. Cement is vital to the construction sector and all infrastructural projects. The construction sector alone constitutes 7 per cent of the country’s gross domestic product (GDP). The industry occupies an important place in the Indian economy because of its strong linkages to other sectors such as:
-construction
-transportation
-coal
-power
Concrete is the second most consumed material after water, with nearly three tones used annually for each person on the planet. Being one of the basic elements for setting up strong and healthy infrastructure cement plays a crucial role in the economic development of any country. Cement is an essential component of infrastructural development and most important input of construction industry particularly in the government infrastructure and housing programs which are necessary for the country’s socio-economic growth and development.
The Indian cement industry is the second largest producer of cement in the world after China but ahead of US and Japan. The cement industry in India comprises 183 large cement plants and over 365 mini cement plants. Currently there are 40 players in the industry across the country. It is consented to be a core sector and has high correlation with GDP. Moreover it grows at the rate of 1.2times that of GDP, i.e, where the GDP is 5%, the growth rate of this sector would be 6%. Also the industry is a significant contributor to the revenue collected by both the central and state governments through excise and sales taxes.
The cement industry in India is experiencing a boom on account of overall growth in the economy. The demand for cement, being a derived one, depends mainly on the industrial activities, real estate business, construction activities and investment in the infrastructure sector. In India, cement production normally peaks in the month of March while it is at its lowest in the month of August and September. The cyclical nature of the industry has meant that only large players are able to withstand the downturn in demand due to their economies of scale, operational efficiencies, centrally controlled distribution systems and geographical diversification.
The Indian cement industry is involved in production of several types of cement such as Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement, etc. They are produced strictly as per the Bureau of Indian Standards (BIS) specifications and their quality is comparable with the best in the world.
Indian cement majors—ACC Ltd, Shree Cement Ltd and Ultratech—have signed a cooperation pact to support low-carbon investments in India. The pact was signed in Geneva with member companies of the World Business Council (WBC) for Sustainable Development’s Cement Sustainability Initiative and International Finance Corporation (IFC). Under the pact, a Low Carbon Technology Roadmap for the Indian cement industry is to be launched this year-end. The roadmap will outline a possible transition path for the cement industry to reduce its direct emissions by 18 per cent by 2050.
2. STRUCTURE OF INDUSTRY
The characteristic of the Indian cement industry needs to be discussed to understand its basic structure better. Firstly, it is the combination of the mini (more than 300 units) and large capacity cement plants, where majority of the production of cement (94%) in the country is by large plants. The conventional method of cement manufacturing used by large plants (Rotary Kiln) needs high capacity, huge deposits of lime stone in its vicinity, high capital investment and long gestation period. Hence mini cement plants based on Vertical shaft Kiln technology, suiting the small deposits of limestone are becoming popular. Also they create less environment pollution.
Against the requirement of 3900 rupees per tonne of capacity of large plants, capital costs for mini-cement plants come to about 1600 to 1900 per tonne. The viability of the location plays a major role in the economics of cement manufacturing. One of the other defining features of the cement industry is the location of the limestone reserves in selected state has resulted in its evolving in the form of clusters. The proximity of coal deposits constitutes another important factor in cement manufacturing. Since cement is a high bulk and low value commodity, completion is also localised because of the cost of transportation of cement of distant markets often results in the product being uncompetitive in those markets.
There are at present seven clusters:
SANTA (Madhya Pradesh)
CHANDRAPUR (North Andhra Pradesh and Maharashtra)
GULBARGA (North Karnataka and East AP),
CHANDERIA (South Rajasthan, Jawad and Neemuch in MP),
BILASPUR (Chhattisgarh),
YERRAGUNTLA (South AP),
NALGONDA (Central AP).
Traditionally, cement has been heavily taxed sector with both the central and the state government levying the taxes which amount to around 30% of the selling price of the cement or around 70%of the ex-factory price (excluding local transport and dealer margins). The major taxes/levies comprise central excise duty; sales tax levied by the respective state government; royalty and cess on limestone and coal, duties on power tariff. The excise duty rates on cement are on specific basis.
The structure of the industry can be viewed as fragmented, although the concentration at the top has increased, as the top 10 players control around 73% of market share, which was 70% during 1990-91, whereas the other 27% of market share is distributed among 32 players.
This is also confirmed by the results of Herfindahl Index 22 (HI). The HI is a measure of industry concentration equal to the sum of the squared market shares of the firms in the industry and an indicator of amount of competition among them.
Our calculations show a very low value of Herfindahl index in the cement industry in India, indicating a very high competition and a low market power. High level of competition in the cement industry is a result of the low entry barriers and the ready availability of technology.
The Indian cement industry is weakly oligopolistic in nature on a national level with top 6 firms among more than 100 firms capturing 55% of the cement market. This nature has been consistent through the years. In addition, the production of cement increased at a CAGR (Compound Annual Growth Rate) of 10% over FY07-11.
2.1 MAJOR PLAYERS
The major players are ACC Ltd, Ambuja Cements Limited, Ultratech Cement Ltd, India cements Ltd, Jaiprakash Associates Ltd, Shree cement Ltd. The shares, in terms of all India cement production, of these top companies have fluctuated by small amounts in the last six years.
2.2 GEOGRAPHIC DISTRIBUTION
The industry is split into five geographical segments named as North, South, east, West and Central. The below figures give the Geographic distribution of installed capacity in India-
- Rajasthan has the highest installed capacity in north India, accounting for 66.5% share in capacity in the region in 2011.
- Chhattisgarh leads the eastern region with a share of 32.6% of total installed capacity (in Million tonnes per annum) in the region in 2011.
- Andhra Pradesh has the highest installed capacity in the southern region, 53.5% share of total installed capacity.
- Madhya Pradesh leads the central region in installed capacity while Gujarat leads the pack in west India.
3. MARKET CHARACTERISTICS
A process, capital intensive industry
The cost of cement plants is usually above € 150M per million tonnes of annual capacity, with correspondingly high costs for modifications. The cost of a new cement plant is equivalent to around 3 years of turnover, which ranks the cement industry among the most capital intensive industries. Long time periods are therefore needed before investments can be recovered and plant modifications have to be carefully planned and must take account of the long-term nature of the industry.
An energy intensive industry
Each tonne of cement produced requires 60 to 130 kilograms of fuel oil or its equivalent, depending on the cement variety and the process used, and about 110 KWh of electricity.
An industry with low labour intensity
With the development of modern automated machinery and continuous material handling devices, the cement industry has become a process industry using a limited amount of skilled labour. A modern plant is usually manned by less than 150 people. In the EU the cement industry represents 45 000 direct jobs. In CEMBUREAU countries, it represents approximately 56 000 direct jobs
An industry with a homogeneous product
Although produced from natural raw materials which vary from plant to plant, cement can be considered a standard product – there are only a few classes of cement and in each class, products from different producers can generally be interchanged. Therefore, price is the most important sales parameter next to customer service; quality premiums exist but are rather limited.
A heavy product
Land transportation costs are significant and it used to be said that cement could not be economically hauled beyond 200 or at most 300 km. The price of long road transportation may even be higher than the cost price. Bulk shipping has changed that, however, and it is now cheaper to cross the Atlantic Ocean with 35,000 tonnes of cargo than to truck it 300 km. However, in large countries transportation costs normally cluster the markets into regional areas, with the exception of a few long-distance transfers (where, for example, sea terminal facilities exist).
A mature product
Demand for cement (which was first produced in the early 1800s) increased considerably in the 20th century, reflecting the development of industry and growing urbanisation. Consumption in the industrialised countries multiplied 6 to 8 times following World War II. Other than a few ups and downs in both the United States and Europe in the intervening years, growth continued until the 1975 oil crisis – with a subsequent decline of 20 to 40 percent in mature markets.However, over the last 25 years, some European countries have doubled or even tripled their consumption (Greece, Portugal, Spain and Turkey), since these countries have experienced significant growth over the last 10 years.
3.1 MARKET PARAMETERS
Consumption of cement is closely linked to both the state of economic development in any given country or region and to the economic cycle. In mature markets, such as in Europe, where cement consumption per capita still varies considerably from one country to another, cement sales are dependent on evolution and habits in the construction sector, a sector that is itself following very closely (usually after a brief delay) the evolution of the economy in general.
3.2 MARKET SIZE
The cement industry of India is expected to add 30-40 million tonnes per annum (MTPA) of capacity in 2013. The industry has a current capacity of 324 MTPA and operates at 75-80 per cent utilisation. It is anticipated that the cement industry players will continue to increase their annual cement output in coming years and the country’s cement production will grow at a compound annual growth rate (CAGR) of around 12 per cent during 2011-12 – 2013-14 to reach 303 million metric tonne (MMT), according to a report titled ‘Indian Cement Industry Forecast to 2012’, by research firm RNCOS.
4. ECONOMIC FACTORS
The economy of India is the 10th largest in the world by nominal GDP, 3rd largest by purchasing power parity. According to report “Real Estate and Construction Professional in India by 2020, investment in infrastructure during 2007-12 was USD 500 billion. The expected level of infrastructure investment predicted in the 11th plan is 2.36 times that of the 10th plan. This is expected to almost double for the 12th 5year plan. India is expected to grow at an average 9% p.a. in next few years. Accompanying this growth will be an increase in demand for infrastructure services. Economic and population growth prospects are expected to pace additional pressure on existing infrastructure facilities.
4.1 DEMAND DRIVERS
Cement Industry has a high push from Housing Sector (64%). Factors that influence this trend are: increasing per capita income, nuclear families and rapid urbanization. Increasing focus of the government on infrastructure development and promotion of low cost affordable housing is also likely to provide impetus to the cement. In the last decade, the country has witnessed a tremendous housing boom. Over a span of the next five years, from 2012 to 2016, the real estate sector is expected to account for 43% of the construction spend in India. For the Plan period-2012-2017, the spending on Infrastructure is expected to go up to 9% of GDP which in turn can translate into double digit growth for demand of cement.
In the long run, demand for cement is expected to be intact. However, the scenario for current demand is slightly different.
4.2 CURRENT SCENARIO OF DEMAND
Contrary to expectations, cement demand has not witnessed any significant revival post monsoon and festive season. Below is the trend:
- July 2012 has pulled down the overall growth in all-India cement production to 5.6% YoY during FY13 as compared to 6.7% in FY12.
- January: Though the demand and prices had shown signs of recovery, this was a temporary phenomenon caused by dealers who had stocked up inventories with the arrival of busy season.
- December–March 2013: Lacklustre demand from construction industry, domestic cement production slowed down showing relatively muted growth of 4.2%.
- Prices increased in northern, eastern and central regions driven by anticipation of pick-up in demand with the arrival of busy season. Further the increase in diesel prices in September and freight rates by Indian Railways in February pushed up the cost which was passed on by the industry.
Going forward, with the busy season coming to an end, demand scenario continuing to look muted and a seasonally weak monsoon season ahead, the pricing power is expected to remain weak for cement industry. The pricing pressures will be more pronounced in south given the capacity overhang in the region and muted capacity utilisation levels in the region.
5. IMPORT EXPORT
Below is the break-up of import and export of various cement varieties. The highest import and export is of Grey cement which is the most common type of ‘basic’ cement. This is followed by Cement clinker. We import maximum tonnes from our neighbour Pakistan (54%), followed by Bangladesh and Nepal. On the contrary we export highest tonnes to Nepal (49%) followed Sri Lanka, Iraq and Egypt, Maldives.
6. MEASURES BY GOVERNMENT FOR DEVELOPMENT OF CEMENT INDUSTRY
The government’s focus on building infrastructure is likely to continue in the near future and the Indian cement industry is expected to sustain an even higher growth rate of 15% over the coming years.
6.1 POLICY AND PROMOTION
Some of the policy measures adopted by the Indian government to support and aid the growth of the Indian cement industry include the following:
- No custom duty on non-cooking coal: In Budget 2012-13, the government has exempted non-coking coal, one of the main raw materials for cement production, from basic customs duty (earlier at 5%). This will have a positive impact of 1-1.5% on the cement industry’s operating profit, according to Crisil, a global analytical company providing ratings, research and risk policy advisory services. The Indian cement industry sources close to one-fourth of its total coal requirement through imported coal.
- North-east package: The Government of India has also approved a package of fiscal incentives and other concessions for the country’s north-east region, namely the North East Industrial and Investment Policy, 2007.
- Highway development funds: Further, to attract foreign investors to its ambitious highways building programme, the Ministry of Road Transport plans to roll out projects worth USD 120 billion by 2016.
- Boost to infrastructure sector: The government is increasing allocation for the infrastructure sector. In FY 2011-12, it allocated USD 46.5 billion funds to the sector, tax-free bonds worth USD 6.5 billion and debt funds for the infrastructure sector, and a comprehensive policy for developing public-private partnership projects. The government has further enhanced the tax-free bond limit enhanced to USD 30 billion in FY 2012-13. It has also established an infrastructure debt fund worth USD 1.8 billion.
- Rural road development: The government has allocated a fund of INR 24,000 crore for the development of rural road projects in FY 2012-13.
6.2 STEPS TAKEN IN THE UNION BUDGET 2013-14:
- Approximately 3000 km of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh to be awarded in the first half of FY-14
- Proposal to provide Rs.60 billion to the Rural Housing Fund in 2013-14 through National Housing Bank for rural housing
- Proposal to start a fund for urban housing by providing Rs.20 billion to set up a Urban Housing Fund through National Housing Bank
- Rs.50 billion to be made available to National Bank for agriculture and rural development to finance construction of warehouses, godowns and cold storage units
- The announcements in the budget are expected to have a marginally positive impact on the cement sector. Governments increased focus on infrastructure development and construction is expected to drive the demand for cement and hereby, impacting the sector indirectly. The continued thrust on infrastructure is likely to provide support to the cement industry going forward
7. ISSUES FACING THE CEMENT INDUSTRY
Cement industry is poised for a challenging time ahead as lower demand due to economic slowdown and higher capacity additions impact company’s growth. Though, recent reforms initiated by Centre does give a ray of hope for better growth prospects in the longer term, the industry is likely to witness some tough challenges in the short to medium term. The impact of higher interest rates in the economy is now proving to be a major hurdle for the largest democracy in the World as exports take a beating too.
7.1 EXCESS CAPACITY
Cement industry in India is at a very critical juncture today. During the five year period of 2007-2012, the industry added around 150 million metric tonnes (MMT) of capacity, taking the total capacity to over 300 mmt. However, demand has not been that strong during last couple of years due to general economic slowdown and lower infrastructure spending. In the short term, this is likely to continue as spending on infrastructure by Government will take some time to revive. Also, demand from real estate-industry’s major user segment-is down due to lower affordability and higher home loan rates.
Since there has been a slowdown in the GDP growth and a drop in the demand for cement, particularly in the period 2009-2012, this additional capacity has led to lower capacity utilization. Capacity utilization has come down from around 94% during 2006-07 to about 84% during 2009-10 and 75% in 2011-12.
Over the next five years, however, the scenario is likely to be positive for the industry, as infrastructure spending gets a boost on the back of robust demand and lower interest rates. Going forward, cement demand will largely be driven by the increased focus of the government on the infrastructure development and promotion of low-cost affordable housing in the country which will continue to boost realty sector and in-turn cement demand.
8. CHALLENGES AHEAD
- High taxation: The overall rate of tax on cement is around 30% in India compared to 19% in China and almost negligible in Thailand.
- Rising raw material: Costs for cement companies will keep rising over the next few years as coal prices will firm up further. New cement capacities may face the additional problem of not getting assured captive coal linkages.
- Transportation and higher fuel costs Though, companies have tried to lessen transportation and fuel costs using various alternatives and technologies, the same are still too high. Freight costs go up due to rising crude prices.
- Foreign players: Apart from these operating costs, the industry is facing challenge of who are ready to tap the Indian market and so are on acquisition spree. Though, consolidation in the industry is good in the long term as it will enhance competitiveness, efficiency and margins, it may also give them much of the untapped market and pricing power due to their size factor.
- Slowdown in the real estate sector: If it persists for an extended period, it would impact the growth in consumption of cement.
- Technology: Most of the cement plants in India use latest, yet they are highly energy intensive in nature. Despite the fact that the technology used by Indian cement companies is among the best in the world, more innovation is required to ensure that cement plans are not only environment-friendly, but also low-cost in nature.
- Per capita consumption: Despite the fact that the Indian cement industry has grown at a commendable rate in the last decade, registering a compounded growth of about 8%, the still remains substantially poor when compared with the world average. This underlines the tremendous scope for growth in the Indian cement industry in the long term
9. PROSPECTS
The growth of the Indian economy has slowed down in recent times on account of the rising inflation, high interest rates, high prices of commodities and fuels. The growth prospects of the cement industry are closely linked to the growth of the overall economy in general and the real estate and construction sectors in particular. The importance of the housing sector in cement demand can be gauged from the fact that it consumes nearly two-thirds of the country’s total cement. If the slowdown in real estate persists for an extended period, it would impact the growth in consumption of cement.
However, the long term drivers for cement demand remain intact. Higher infrastructure spending, robust growth in rural housing and peaking interest rates are likely to augur well for the cement industry. The government plans to spend US$ 1 trillion on infrastructure in the 12th five year plan period (2012-17). The same during the 11th plan period was US$ 514 bn. The focus on infrastructure development is expected to boost cement demand.
9.1 INVESTMENT PLANS BY LEADING COMPANIES:
The cement and gypsum products sector has attracted foreign direct investments (FDI) worth Rs 11,779.04 crore (US$ 2.12 billion) between April 2000 to February 2013, according to the data published by the Department of Industrial Policy and Promotion (DIPP).
Some of the major investments in the sector are as follows:
- Barings Private Equity Asia has picked up a 14 per cent minority stake in the Indian unit of cement major Lafarge, for Rs 1,427 crore (US$ 257.11 million).
- Sinoma International Engineering (Hong Kong) Ltd, a part of the Chinese state-run National Materials Group Corp, has entered the Indian cement equipment industry by acquiring a majority stake in Chennai-based equipment manufacturer LNV Technology Ltd.
- Dalmia Cement plans to invest Rs 1,800 crore (US$ 324.32 million) to increase the company’s cement manufacturing capacity over the next two years. The company also plans to set up a 2.5 million tonne (MT) green-field unit in Karnataka.
- Ambuja Cements Ltd plans to invest Rs 2,000 crore (US$ 360.33 million) to enhance its cement capacities in Rajasthan and northern region. The proposed project at Rajasthan would add five MT capacity to the total cement production of India.
- Reliance Cement Company Pvt Ltd (RCC), a subsidiary of Reliance Infrastructure Ltd, has commenced production of cement from its first manufacturing unit at Butibori, Nagpur in Maharashtra
10. Porter’s Five force analysis of cement industry
Bargaining power of buyers: moderate
In the cement industry, the bargaining power buyers is moderate because the majority of buyers are bulk buyers. For example, big construction firms, corporate who want to build their own offices, etc. These buyers can bargain with the cement companies. However, their bargaining power is not very high as their purchases form a small part of the total production of the companies. Hence, they cannot exert much influence on the manufacturers. Moreover, one potential bargaining power with the buyers is the threat of importing cement. However, this threat is limited to an extent as the cost of import will increase the overall cost of the project.
Bargaining power of Suppliers: High
In this industry, the suppliers exert a very high power. This is so because the raw materials form a very large part of the process in the manufacturing of cement. Shortage in supply of raw materials can cripple the whole plant and can lead to huge losses. When the suppliers demand something, the negotiations have to be completed quickly and the result is more or less in favour of suppliers. For example, if the coal suppliers stop supplying coal to the plant, it cannot function and production will come to a standstill. The supply of coal has to resume as quickly as possible. Hence, the suppliers exert a great amount of influence in the decisions of the cement manufacturing companies.
Threat of substitutes: Low
In India, cement is the ultimate material used for almost all type of construction work. Bitumen is one of the substitutes of cement but these days cement is even replacing bitumen. Another substitute for cement is engineering plastic. This also cannot replace cement in many areas of work. Hence, there is practically no material to substitute cement.
Threat of new entrants: Low
Cement industry is a highly capital intensive industry with long gestation period. Also, the market is experiencing the problem of over-capacity in recent times. The existing players are also expanding their production capacity to meet future demand. All these factors act as a deterrent to new entrants even though labour and manpower is freely available.
Inter-Firm Rivalry: High
Cement industry is one of the highly competitive markets in India. Many players in this industry are large scale players with huge capital invested in setting up the production units. This factor raises the exit barrier for the companies. Hence, they stay in the industry and start aggressive competition. Also, the differentiation in types of cement is marginal, hence the switching cost to customers is not high, so firms compete intensely to gain market share. Also, sometimes problem of overcapacity comes into play. This leads to a price war and competition intensifies.
11.ENVIRONMENTAL SUSTAINABILITY
Use of alternate fuels:
The use of alternate fuels is increasing in the cement industry due to various factors such as uncertainty in the availability of coal, high cost, etc. Also, the Indian cement industry has agreed to the environment Sustaibility goal programme and hence it has to reduce its total direct emissions. To help the cement industries achieve this target, they are gradually migrating towards alternate fuels. Processes such as Plastic Preparation Process(PPP), Mechanical Thermal process(MTP), Tire Derived Fuels, etc are helping the cement industry in achieving their target of reduction in emissions. Globally many cement industries have started using alternate fuels because not only they are environmentally friendly but also economically viable. These fuels are the future of the cement industry because as the demand for cement increase, the need for energy increases. But, the production of conventional fuels is not increasing at a rate which can match the demand of cement. Hence, alternate fuels is the way forward for cement industry.
12.CONCLUSION
From the above analysis, we can conclude that the growth prospect of cement industry is tremendous as the demand is picking up due to government initiatives as well as increase in the construction work. The government initiatives has provided the required boost for the industry to think of expansion and increasing their capacity to not only fulfil domestic demand but also for exporting cement. The outlook for the cement industry is looking positive. Also, the use of alternate fuels has increased the brand image of the cement companies and also helped them in reducing their dependence on coal for energy production.
Also , the competition in industry is intensifying which is good for buyers, as they can hope to benefit from the competitive strategies of the players in the cement industry. Moreover, consolidation of large player in cement industry has provided some amount of stability in the supply of cement as well as it has brought some order in the industry.
However, some factors such as scarcity of coal, decrease in demand, weakening economy, rise in home loan rates can derail to growth of cement industry. The scarcity of coal is one of the biggest impediments in the growth of cement industry as coals is one of the most essential raw material in manufacturing of cement and its scarcity can lead to closure of plant and can lead to huge losses. Also, demand for cement in decreasing for quite some time because of slowdown in new construction, reduction in government spending on infrastructure, etc. However, the demand is expected to pick up in coming months because of various government initiatives as well as increase in new constructions. Moreover, with the economy weakening and rise in interest rates for home loans has adversely affected the construction business with has indirectly impacted the cement industry.
After considering all the factors, we can still safely conclude that the growth story of cement industry is still not over and it can be expected to pick up in the coming future on various positive signals from market such as rise in construction, picking up of global demand, introduction of fuel efficient technology as well as government initiatives.
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