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CEMENT

INTRODUCTION | NATURE OF THE INDUSTRY | INDUSTRY STRUCTURE | INPUTS | COSTS AND PROFITABILITY | MARKET DYNAMICS | MERGERS AND ACQUISITIONS | FUTURE OUTLOOK


INTRODUCTION

The Indian cement sector has evolved significantly in the last two decades, going through all the phases of a typical cyclical industry. After having gone through a period of over-demand and the phase of massive capacity additions, the industry is currently in a consolidation phase, with most of the major greenfield capacity additions over.

The Indian cement industry was fully regulated, subject to price and distribution controls, almost constantly till the early 1980s. It was characterised by low prices and a supply-demand mismatch, with the growth in production capacity having failed to keep pace with the growing demand. Even in 1980, the output was only around 18 million tonnes due to the inhibiting effect of total control.

The sector was partially decontrolled in 1982, with the government freeing a segment of the production from price and distribution controls. Over the decade of the 80s, the industry witnessed a sharp growth rate, both in capacity and production, in sharp contrast to the virtual stagnation that had gripped the industry in the late 70s.

Post deregulation, the industry suddenly became a profitable proposition and a number of players entered into the segment to tap the latent demand and the benefits of price decontrol. Larger capacity plants came up, which were based on the more efficient dry process, as against the older plants which were undersized as well as technologically obsolete using the inefficient wet process. The production in 1989 rose to 44.08 mn tonnes as compared to only 23.50 tonnes in 1983.

The industry was totally freed of all controls in 1989 and underwent a complete metamorphosis after the two phases of decontrol. The demand rose at an average 8-10 per cent over the last two decades. The output, in the last decade, grew by nearly two-fold. The production in 1999 stood at 81.65 mn tonnes (excluding mini cement plants). The aggregate capacity also increased more than 100 per cent, to 107.56 mn tonnes in 1999 as compared to 56.36 mn tonnes in 1989. The production grew by a record 15% to 94.21 mn tonnes in 1999-2000.

The industry entered the new millenium with a new mantra of consolidation. Currently, the top companies viz. Larsen & Toubro, Associated Cement Companies, Grasim Industries, Gujarat Ambuja Cement and India Cements, account for about 50 per cent of the industry capacity. The percentage has shot up over the last three years, when the top 5 companies accounted for around 20 per cent of the capacities.

The MNCs have also shown an increasing interest in the domestic market. Lafarge, the first MNC entrant, picked up the capacities of Tata Steel and Raymond, paying hefty premiums. Other players like Cemex of Mexico, Holder Bank of Switzerland, Cements Francais of France, a part of the Italcementi Group have also shown interest in increasing their presence in the domestic market.

Within the next three to five years the industry is expected to be dominated by five to six big players and less than ten companies in all, both Indian and foreign. The sector is currently in a transient state, but with the abundance of natural resources in the country and the huge potential demand, the overall sentiment towards this sector remains positive.

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NATURE OF THE INDUSTRY

  • Fragmented - The Indian cement industry has been characterised by a high degree of fragmentation. Currently the number of players in the domestic industry is over 60, which is slated to come down to less than ten in the next three to five years. As on March 31, 2000 there were 113 large plants, accounting for 92 per cent of the total capacity and 300 white and mini plants in the country, accounting for the rest. The top 5 companies contribute about 50 per cent of the total domestic capacity, while the remaining is distributed among the 50 odd companies in the industry.

  • Cyclical - Cement industry is highly cyclical in nature and depends largely on the economic health of the country. There is a high degree of correlation between the GDP growth and the growth in cement consumption. This can be gauged by the fact that after experiencing robust growth from 1994 to 1996, the sector was one of the worst affected due to economic slowdown during 1997 to 1999. The industry registered an impressive growth of 15 per cent during the 1999-2000 which was mainly due to demand from housing sector which accounts for 60 per cent of cement consumption, the rest accounted equally between infrastructure and industry/others.

  • Standardised Technology - Cement manufacturing is a standardised and simple process, which does not offer any technological advantage to specific players. The industry is characterized by matured and stable technology with only minor improvements taking place over the years. The financial viability / profitability of a unit depends on operational efficiency (both manufacturing and marketing) apart from general demand supply situation in the region. Any innovations in the manufacturing process can be easily diffused across the industry. Thus access to the latest technology is not an entry barrier for anyone entering the sector.

  • Localised operations - Given the bulky nature of the product and the resultant high freight costs, it is economical to sell in a small radius of the plant location and transporting cement beyond 250 km is economically unviable. Regional supply imbalances affect the realization and margins of individual plants. Uneven capacity expansions have intensified these imbalances in the industry. Significant capacity addition in northern / central and western India resulted in an over supply problem during past couple of years. South, which was hitherto a fairly insulated region, has started facing the problem of oversupply because of new capacities installed in the region over the last two years.

  • Conglomerateness - The domestic cement industry is characterised by the presence of various diversified companies, which have significant presence in the cement sector. These were the players which ventured into the sector after the government loosened its control in 1982. Some of the prominent diversified players operating in this sector are - L&T, Grasim Industries, Jaiprakash Industries and Century Textiles. The diversified conglomerates like the Birla Group and the Singhanias (Raymonds, JK Synthetics) have significant interests in the cement business.

  • Insulated from import threat - The international trade in cement is very limited and only between the neighbouring countries due to the bulky nature of cement. The domestic industry is relatively insulated from import threat, mainly on account of the freight rates involved in transporting cement. The countries that export their produce to India are amongst the cement surplus countries having an access to the seas. These include mainly the East Asian countries. The countries where Indian companies like Gujarat Ambuja Cements Ltd export their product are located near Indian shores and these include Bangladesh, Nepal, Sri Lanka, UAE and Mauritius.

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INDUSTRY STRUCTURE

The cement industry can be classified based on manufacturing process, geographical dispersion and production capacity.

  • Manufacturing Process: Cement is manufactured by using the wet, semi dry and dry processes. The wet process was popular in the past as it provided better control over raw materials mixing process. However, the dry process has now gained popularity globally because it is space saving, energy efficient and economical.

Capacity distribution and consumption norms

Process

Capacity (TPD)

% of total

Power KWh/MT

Fuel Kcal/Kg

Dry

Semi-Dry

Wet

282486

13910

5260

93

5

2

120-125

115-120

110-115

750-800

900-1100

1300-1600

Total

301656

100

   

  • Geographical Dispersion: Limestone is the most important material input into cement manufacture. The plant locations are primarily determined based on the proximity of 'cement-grade' limestone deposits. These limestone deposits have been classified as "clusters", some of which overlap two states.

Cluster Wise Installed Capacity (Large Plants)

Cluster

State

No. of Plants

Capacity (mn tpa)

Satna

MP

8

12.18

Bilaspur

MP

9

11.16

Gulbarga

Karnataka / AP

7

7.82

Chandrapur

Maharashtra / AP

7

7.49

Chanderia

Rajasthan / MP

7

7.45

Nalgonda

AP

8

5.85

Yerraguntla

AP

4

5.40

Sub Total

 

50

57.35 (52.5%)

Non Cluster

 

63

52.75 (47.5%)

Total

 

120

110.10


Production Capacity :
Cement plants with a capacity of upto 0.3 mn tpa are classified as mini cement plants and are eligible for concessional excise duty. Though the minimum economic size of a cement plant is 1 mn tpa, there are over 300 white and mini cement plants in India with a collective capacity of only 9 mn tpa (8 per cent of the total domestic installed capacity). Most of the new cement plants being set up have a capacity of 1 mn tpa or more. The average cost of setting up a mini cement plant is about Rs 1400 per tonne, while for a large cement plant it is about Rs 3500 per tonne.

Statewise capacity / production

 

Capacity (as on 31.3 2000) MT

%age to total

Production (1999-2000) MT

%age to total

MP

26.23

23.8

22.47

23.8

AP

17

15.5

14.85

15.8

Rajasthan

14.53

13.2

14.32

15.2

Gujarat

12.14

11

9.29

9.9

Tamil Nadu

7.62

6.9

7.86

8.3

Maharashtra

7.21

6.6

6.29

6.7

Karnataka

6.82

6.2

6.03

6.4

Others

18.55

16.8

13.1

13.9

Total

110.1

 

94.21

 

 

Statewise capacity / production

 

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INPUTS

Limestone is the principal raw material for the manufacture of clinker. one tonne of clinker requires about 1.43 tonnes of limestone. In addition, a small amount of iron ore and other corrective material is used in the production of clinker. A small amount of gypsum (approximately 5 per cent) is added to each tonne of clinker to produce cement.

Coal is predominantly used as the fuel in the Indian cement industry. The quality of coal and the distance of the plant from the coal supplier are the main determinants of the cost of coal.

Consumption - for producing one tonne of cement

Imported - 120 -150 kg

Domestic - 200 - 220 kg

Power The main considerations in the case of the power input are the power tariffs and the reliability of supply. The plants in a cluster, which spans across two states, have different sets of electricity prices.

Consumption - For producing one tonne of cement

Modern plants - 85 - 90 kwh

Old plants - 95 - 120 kwh

Many of the large cement plants in the country have now installed captive power plants to ensure reliability of supply and to insulate themselves from the rising power tariffs. Currently, the total generating capacity of these captive power plants is 1289.15 MW.

Diesel - 895.75 MW

Thermal - 313.15 MW

Wind Farms - 80.25 MW

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COSTS AND PROFITABILITY

Cement is a power intensive industry. Nearly 120 kWh of power is required to produce one tonne of cement. Units employing modern technology and better-cost management strategies like GACL have reported a power consumption of 96 kWh / tonne in FY2000. Most of the new plants using the dry process have been able to improve the energy efficiency and enjoy a competitive edge over wet / semi-dry process based plants. Moreover, coast based plants are able to import low ash content coal, thereby resulting in lower production costs. Although the landed cost of imported coal is generally higher than domestic price, the per Kcal cost works out much cheaper. Power accounts for nearly 16 per cent of total operating costs of cement industry. Hence, availability of stable and continuous power supply is of critical importance to the profitability of industry.

Cost Break up

The reliability of power supplied by State electricity boards is poor in major cement producing states and this happens to be a major cause of concern for most of the cement manufacturers. For example, states like MP, AP, Rajasthan and Karnataka have power cuts of 35-40 per cent for more than 6-8 months of the year. Thus, companies having low dependence on power supplied by SEBs have a competitive advantage. As a result, the cement industry has started trying to insulate itself from vagaries of power supply by setting up captive thermal power plants while diesel generator sets are used as a standby arrangement. Captive power accounted for about 39 per cent of total cement production in the fiscal 1999-2000.

Freight at 12-15 per cent of sales, accounts for a significant part of total expenses. Ability to control this by selling a larger part of the production in a small radius ensures higher net realizations. Around the world, almost 80 per cent of the cement transportation is carried out in the bulk form. But in India, only 1 per cent of total cement is transported in this form. This is because of the attendant problem like inadequate infrastructure in the form of port facilities and lack of timely availability of wagons from railways.

Unreliable rail transport has resulted in the increasing proportion of cement being transported by road (59 per cent in FY00). The share of rail dispatches in cement transport has declined from 53 per cent in FY93 to 41 per cent in FY00. Cost of transporting coal from mines to the plant is another major cost component. To overcome increasing freight costs, some of the coast-based companies have started using water transport. Prominent among these are Gujarat Ambuja Cements and India Cements. Though this involves initial capital expenditure on acquiring ships and installing jetties, the operating costs are almost half of road transport.

Cement packaging cost account for nearly 4 per cent of total costs for a cement manufacturer. HDPE bags, paper bags or gunny bags are used as the packaging material as required or the material is transported in bulk form.

Given the role government has in fixing the key input costs like freight, coal etc., it is very difficult for any company to minimize the cost beyond a point. The key driver of profitability is cement prices, which fluctuate depending on demand supply scenario.

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MARKET DYNAMICS

Supply-Demand balance

The demand for cement mainly depends on the level of development and the rate of growth of the economy. There are no real substitutes for cement and it forms a very low proportion of the total cost. The demand for cement is, therefore, price inelastic. This implies that price cutting does not help in boosting the demand in an oversupply condition. At the same time if supply falls short of demand, the prices can increase substantially without hurting the demand. This makes the industry conducive for growing monopolies.

Demand Break up

On the supply side also, the large players have to consolidate their hold on the capacities through acquisitions in order to increase their profitability. Since the government controls a major portion of the cost of production, through administered prices of fuel and power and through taxes, there is very little scope for cost cutting. The companies can therefore either raise prices or volumes in order to increase their profits. In a competitive market scenario, it is difficult for a single manufacturer to control prices. The companies can increase their volumes or market share through product differentiation or through acquisitions. Since there is again a limit to the extent of product differentiation possible given the nature of the product, consolidation is inevitable and this has been witnessed in the cement industry globally.

India is currently the second largest producer of cement in the world after China, accounting for about 6-7 per cent of the world capacity. To put things in perspective, China with a capacity of over 530 mn tonnes, accounts for over 30 per cent of the world capacity. The domestic cement industry has an installed capacity of 118.16 MT consisting of 109.16 MT in large plants and 9 MT in white and mini cement plants. A spurt in capacity addition during 1996-97 to 1998-99, when 26 mn tonnes of capacity was added, resulted in an imbalance of supply and demand in the country which led to an erosion in the price of cement and hence in the profitability of the companies. However, the capacity addition slowed down to only 2 million tonnes in 1999-2000 and no new plant is expected to come on stream during 2000-01.

Over the last decade, the cement industry showed a CAGR of 8 per cent. In the fiscal 1999-2000, however, the demand jumped up to about 15-18 per cent, driven mainly by the high 8 per cent growth in the agricultural segment. The strong demand from the housing and infrastructure segments was responsible for the high growth rates.

The exports have not been forthcoming because of the high prices and the insufficient port infrastructure in the domestic market. The prices in the domestic market have not been competitive vis-a-vis the international because of the high government levies & duties, high power tariff and high interest costs on export credit.

Price movement

Also, the Indian ports lack proper storage facilities and loading-unloading facilities. The domestic players have, therefore, not been able to utilise the advantage of the vast coastline, which offers a great opportunity for export.

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MERGERS AND ACQUISITIONS

The last two years have seen a flurry of activity on the mergers and acquisition front. The larger players are currently strengthening their base by restructuring and consolidation. With the demand not picking up fast enough and the supply in excess, the companies will continue to vie for a larger piece of the pie. Also, the squeeze on margins has been putting a pressure on the corporates to cut competition. As there was a slump in the cement industry in 1998-99, the number of mergers & acquisitions suddenly shot up. In that year five deals took place in quick succession. But, as demand picked up, the companies started asking better prices, 1999-00 saw just two acquisitions and one strategic investment.

Currently, just five companies - L&T, Gujarat Ambuja Cements, India Cements, ACC and Grasim Industries - control about 50 per cent of the industry capacity. This percentage has shot up in the last two to three years as these companies expanded capacities through acquisitions and setting up greenfield units. Three years back, the top five units accounted for only around 20 per cent of the capacity.

The international majors have also been investing heavily in the domestic sector and plan to enter the Indian cement industry through the acquisition route. Lafarge has been the most active, acquiring Tata Steel's cement plants at Sonadih and Jujobera and Raymond's cement plants at Bilaspur, while the Italcementi Group took stake in Zuari Cements through its group company, Cements Francais. Apart from these two Cemex of Mexico, HolderBank of Switzerland and Blue Circle of the UK have also shown interest in picking up stakes in the domestic industry. Blue Circle was believed to be interested in B.K. Birla-owned Century Textile's cement facility, besides G.P. Birla and C.K. Birla's Orient Cement and the S.K. Birla-owned Mysore Cements. The international cement companies have deep pockets and an ability to take losses for years. Lafarge, with a stronghold in the eastern markets now, is believed to be controlling the price equations in the region.

Mergers & Acquisitions in Last Two Years

Acquirer

Acquired Company

Capacity (MT)

Cost (Rs mn)

1998-1999

Grasim

Dharani Cement

0.07

320

Indian Rayon

3.20

Share Swap

Shree Digvijay

1.23

650

India Cement

Raasi Cement

1.80

3200

Lafarge

Tisco

1.73

5500

L&T

Narmada Cement

1.40

1700

1999-2000

GACL

ACC (Investment)

-

4551

DLF Cement

1.40

3500

India Cement

Sri Vishnu Cement

1.00

1150

 

 

 

 

2000 Onwards

Lafarge

Raymond Cement

2.24

7850

Gujarat Ambuja

ACC (Investment)

-

2529

Italcementi

Zuari (Investment)

-

2990


While the average acquisition price should range between $ 75 to $ 80 per tonne capacity, as is accepted internationally, cement suitors are paying up to $ 85 to $ 90 per tonne capacity for their recent acquisitions. But this is less than the replacement cost of the plants at $80-100 per tonne.

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FUTURE OUTLOOK

Most economic forecasts for the Indian cement industry indicate a favourable outlook for the Indian cement sector. With no significant capacity addition expected, the supply-demand position is expected to be better balanced. Retail housing segment is expected to show significant demand growth over the next two years.

With the industrial production showing an upward trend, housing construction showing a sign of revival and the government gearing up to spend more on infrastructure, the sector looks favourably poised. The overall demand growth is expected to be about 7-8 per cent. Withdrawal of sales tax benefits for the new units will give an added push to consolidation via acquisitions. Consolidation will be more regional, with companies seeking to gain dominance in their chosen regions.

India's per capita cement consumption is less than 100 kg compared to the world average of 250 kg. Currently, the total cement demand in India is lower than the total capacity. The Cement Manufacturers Association of India projects a demand of 101 mn tpa in 2000-01 as against 93 mn tpa last year. Against this, the total installed capacity is 109 mn tpa. However, seven million tonnes of Cement Corporation of India and two million tonnes of UP Cement are lying idle. An 8-10 per cent growth is projected in the coming years, which will take the demand to 200 million tonnes in 10 years.

A focus on more value-added products like Ready Mix Concrete (RMC) is emerging. RMC is a compound in which sand, gravel, additives and water are added to cement and sold as ready made concrete. Cement producers benefit from RMC production as it involves low capital expenditure. The cost of setting up a 100 metric cube per hour plant is in the range of Rs.70 to 90 mn. While the central government has declared a zero excise duty on RMC, the Maharashtra state government has made it mandatory to use RMC in construction of all the flyovers. With these measures, the total RMC consumption is expected to touch 6 per cent of total cement capacity in next four years. To tap this existing potential, leading cement manufacturers in the country like L&T and ACC have already announced their plans to expand their RMC capacities in coming years.

Next cost cutting measure appears to be transporting bulk cement. This method of cement transportation is preferred by cement manufacturers as it results in lower packaging costs, hence lower demurrage costs. At present, cement is predominantly sold in 50-kg bags. But the pattern appears to be changing as cement manufacturers have increasingly started selling cement in bulk, especially in cities where the construction activity is at its peak. Most of the cement sold in bulk is currently used by the ready mix concrete plants. Cement consumed in bulk could help save about Rs 110 per tonne (Rs 5.50 per 50-kg bag) compared to the use of conventional bags. Around the world, almost 80 per cent of the cement transportation is carried out in bulk form. But in India, only about 1 per cent of total cement is transported in this form. This is because of the attendant problems like inadequate infrastructure in the form of port facilities and lack of timely availability of wagons from the railways. Cement packaging costs account for nearly 4 per cent of total costs for a cement manufacturer.

The industry will see more action on the mergers and acquisitions front. So far, the market has seen only two major international players, Lafarge and Cements Francais, in action. But others, such as Cemex, Blue Circle and the big daddy, Holders Bank are waiting in the wings. These global players are looking towards getting a foothold in the Indian market, offering a higher acquisition price than the international standards. Within the next three to five years the industry is expected to be dominated by five to six big players and less than ten companies in all, both Indian and foreign.

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