Cementing prospects
Cement

Cementing prospects

Notwithstanding flat demand and supply side challenges, cement players are gearing up for better times, discovers CHARU BAHRI.

In the cement sector, all eyes are focused on economic recovery. Cement demand in the current fiscal has been lower than the last one as a result of the adverse impact on construction growth of the sand mining ban, non-availability of bricks, delays in regulatory approvals for infrastructure development and a weak real-estate sector.

Lacklustre demand

According to Teena Virmani, Vice President- Private Client Group Research, Kotak Securities, "Demand has failed to improve in line with expectations. Core industries data shows that the cumulative growth in cement production during April to November 2013-14 was 4 per cent compared to April to November 2012-13."

"The cement industry has seen de-growth. However, some growth has been observed in West Bengal, Bihar and Gujarat," says Vivek Agrawal, Chief Marketing Officer, UltraTech Cement Ltd. "A difficult macro environment and political paralysis have subdued demand growth," observes Vinita Singhania, Vice Chairman & Managing Director, JK Lakshmi Cement Ltd.

"Demand for cement has not grown after the monsoons owing to the recessionary trends in the markets," says Pushp Raj Singh, Executive Director, Dalmia Cement Bharat Ltd. "Renowned builders are struggling to get strong levels of bookings at project launches because of higher interest rates. Some private-sector projects are going slow because of the impending elections."

"Demand continues to be flat in with no visible signs of improvement," opines Nabil Francis, Managing Director, Zuari Cement. And Martin Kriegner, Country CEO, Lafarge India, cites "slowdown in construction and attracting the right talent to meet customer needs" as current challenges.

Takers for RMC


What about demand for RMC? "RMC is a ready-to-use product and, contrary to cement, cannot be stored," explains Agrawal. "Demand for RMC generates a lead indicator for cement demand. RMC demand is driven primarily by the real estate sector (76 per cent) and is supported by the infrastructure (17 per cent) and industrial sectors. Last year, around 79 per cent of RMC demand was driven by Tier I cities. Demand for RMC has picked up after the monsoon and elections in some states, particularly in the south. However, Maharashtra is still reeling under the pressure from a challenging market environment."

"Broadly the RMC market follows the cement market," adds Singh. "Aggregate shortages, elections and slowdown of other infra projects seem to be having a greater negative impact on demand for RMC and, therefore, on cement demand." Possible growth driversOpinions vary on recovery. Sceptical about demand recovering prior to the elections, Singhania says, "Pre-election infrastructure spend may be constrained. Uncertainty about the new government is making companies defer their investment plans. Companies are also banking on an interest rate cut by the central bank in June, which they say will revive home sales and construction."

India Research & Ratings (Ind-Ra) expects to see some uptick in demand from 2HFY15 owing to a provision in the Union Budget of 2013-2014 for an investment allowance for infrastructure projects of Rs 1,000 million and above between April 1, 2014, and March 31, 2015. A fractured electoral mandate could, however, adversely impact this revival. In the absence of any major projects unfolding in the upcoming quarters, Amey Joshi, Analyst, India Ratings and Research, expects that rural/semi-rural demand and housing demand from Tier II and Tier III cities will be the key driver of cement demand in FY15. "Supported by an expected push from rural cement demand, growth for the sector is likely to be in the range of 5-6 per cent," he says.

Another view is that the last ditch efforts of the incumbent government to revive infrastructure development may boost demand in coming months. Virmani says, "In the near to medium term, demand is likely to firm up with improvement in rural spending and commencement of work on stalled projects." In a similar vein, Agarwal observes, "With elections nearing and as governments make last ditch attempts to depict themselves positively with voters, we expect some movement on large infrastructure projects, which will improve demand for cement and concrete. Seventy projects worth Rs 1.5 lakh crore have recently been cleared by the Ministry of Environment and Forests."

Hard trends

Limited construction activity bears upon the industry's recovery prospects and on cement prices. The past two quarters have seen marked price volatility. With key growth drivers conspicuously missing, the construction industry would have welcomed some price reduction. Conversely, cement prices across India have largely charted an upward incline—no thanks to supply side reasons.

"In spite of sluggish demand for cement, prices have remained firm because of high freight and energy costs,' says," observes Amitava Chakraborty, Vice-President – Procurement and Subcontract, HCC. "Prices of imported coal have gone up significantly while the rupee has steeply depreciated."

Being a bulk commodity, cement is freight-intensive. The approximate 20 per cent hike in diesel prices and 30 per cent increase in railway freight charges have substantially increased the landed cost of cement. "After substantial increases in costs, raw material costs comprise 13-15 per cent of the total cost of cement production while power and fuel costs account for 25-27 per cent," notes Joshi.

Worse, all this is happening in the backdrop of sluggish market conditions marked by slow industrial and agricultural growth. Is a turnaround in sight?

Challenging times

Cement prices traditionally follow a cyclical pattern with prices remaining firm during the construction season and witnessing a decline during the monsoons. In the coming months, Virmani expects prices to firm up during Q4FY14 and remain firm till the onset of the monsoons.

"Cement prices are expected to be on shaky ground till the elections are over and a stable government is in place," believes Singh. "If the new government focuses on employment and infrastructure, there is a likelihood that prices will move north in the latter half of FY14-15."

Any price increase will bode well for cement companies, for continued cost pressures are weighing on their profitability. "The recent price rise has, however, only offset the impact of cost pressures to some extent," says Virmani, "certainly not fully."
"Escalating costs of diesel and railway freight continue to be sources of worry," says Singhania. "Operating margins in the cement sector, which have shrunk by about 5-7 percentage points for many companies, are unlikely to see an improvement in spite of the recent spurt in prices."

The profitability of non-integrated players has been affected the most. Worse, because of subdued macroeconomic conditions, Ind-Ra does not expect cement companies to gain the bargaining power to pass on the complete increase in costs to the final consumers.

Another dampener that may cause prices to remain relatively stagnant is excess capacity in the industry, owing to the planned expansion of existing players and as a result of newer entrants such as Reliance Cement, ABG Cement and Siddhi Vinayak Cement. Capacity additions are creating a demand-supply imbalance in the industry, bringing down average capacity utilisation levels and augmenting the challenges facing cement companies. According to Singhania, "Soon, the industry will have about 99 million tonne per annum (mtpa) of surplus capacity."

Long-term growth

Notwithstanding the current slowdown, players are positive about the long-term prospects. Italian major Italcementi's subsidiary Zuari Cement is investing in a new 3 mtpa cement plant in Gulbarga, a grinding plant in Solapur and a terminal at Kochi.

Lafarge sees India as an important market because of its size and potential. "We estimate the Indian construction market to be worth around Euro 300 billion, which is substantial in absolute terms," says Kriegner. "Analysis of per-capita indicators for India, when compared to other countries, substantiates that India is at a very ready stage for development. For instance, the per-capita consumption of cement in India is 180 kg vis-à-vis the world average of around 350 kg."

In particular, Kriegner believes India's growing youthful population augurs well for the construction and cement industries as the youth aspire for a better quality of life, better housing, better cities and better infrastructure. "Affordable housing projects are already being developed across the country," he adds. "Further, the government's focus on growth will have to be accompanied by increased spending on infrastructure. Rise in disposable income among the rural masses is also a positive development for the industry."

"In the long-term, increasing urbanisation will boost demand for urban infrastructure and housing, which, in turn, will boost demand for cement," Agarwal points out. "There is latent demand for housing, but interest rates need to soften."

Vending stability

All considered, construction companies desire some stability in cement prices and supplies. "Being an infrastructure company whose major raw material is cement, we seek stability in cement prices over a period of time," says Chakraborty. "Prices should ideally be kept valid for a year. As things stand, cement prices change almost every month, which makes it challenging to execute current projects competitively and gain the foresight to procure future business."

While he understands why cement companies give preference to the retail sector (being a major consumer) when demand burgeons, Chakraborty feels that he would like to see equal importance being given to the infrastructure sector.
To avoid the perils of uncertainty of cement and RMC prices, Sobha Developers has entered into long-term fixed price arrangements with RMC suppliers. "Our approach is a sustainable model in the long run," opines Raj Pillai, Executive Director, Concrete Products Division, Sobha Developers.

Evidently, there is scope for suppliers to offer buyers long-term contracts for cement and RMC.

Innovation ahoy

As the industry develops, Pillai sees scope for RMC to improve in qualitative terms, just as other commodity products. "Already many players are using a variety of supplementary cementitious materials like fly ash, GGBS and silica fume in concrete, thus conserving cement and helping to reduce emission of greenhouse gases," he says.

Pillai also sees room for the ready-mix industry to focus more on value-added products like high-grade concrete, self-compacting concrete and performance-based concrete. "These products can enable the construction of futuristic buildings and can also help RMC players differentiate themselves in the market," he reasons.

For its part, Lafarge is focusing on introducing innovative solutions. Its latest offerings include Concrete Master, which enables customers (especially those in congested areas) to order RMC in 30-kg reinforced bags and allows up to four hours of workability before initial setting; Agilia, a self-consolidating concrete which helps in faster concrete placement with minimal cost; and Lafarge Infracem, a high-quality, heavy-duty blended cement best suited for heavy construction work including mass concreting, foundations and heavy-duty RCC work.

According to Arvind Pathak, CEO, Reliance Cement, "Reliance Cement has introduced new-age UPSD technology that produces cement with high fineness and rapid setting property, which results in high initial strength. This allows our consumers to build long-lasting structures in the quickest possible construction time. Our ultramodern packaging also ensures zero loss to end consumers. The product is also recommended as an alternative to OPC." Meanwhile, Ultratech Concrete has recently started to supply M80 self-compacting concrete: "UltraTech Freeflow, a first for the country, and M80 high-grade UltraTech Hypercon."

To boost innovation in concrete technology, Agrawal sees the need for existing market-based design specifications for concrete to be revised: "These set prescriptions like minimum cement content and specifications like pure OPC concrete only or limiting supplementary cementitious material to 15-20 per cent."

For its part, Zuari Cement is offering a range of performance-oriented products from the Global 'i.nova' product range. Its new TX-active and revolutionary 'Transparent Cement' focuses on reducing pollution and offering a new set of innovative applications in concrete.

Also, Dalmia Cement with HALC component has seen good acceptance since being launched last year. Singh sees opportunities in pre-cast and special applications cement, "areas where we are evaluating having more focused products".

Service orientation

Services are also emerging as an area of differentiation for major players—with good reason. "We appreciate cement manufacturers who offer technical support to achieve economies of scale on cement consumption per cu m of concrete," says Chakraborty.

To this end, Lafarge is looking at growth by providing various customer segments with integrated solutions through its network of cement, RMX and aggregate plants. "Rather than selling a product at the lowest price, we will be focusing on the end needs of customers," explains Kriegner. "Lafarge additionally offers installation services by professional applicators for its new decorative concrete product, Artevia."

"Safety and operational efficiency have been our key focus in 2013; we aim to reach benchmark competencies in these two areas," shares Francis of Zuari. "Our key challenge is to reduce the lead time on all fronts—from customer requisition and production to distribution cycles. With increase in our capacity by 2015 covering larger geographies, we will focus on providing better customer services."

It's a no-brainer: for players who are willing to differentiate, opportunities will always abound.
  1. Vivek Agrawal, Chief Marketing Officer, UltraTech Cement Ltd
  2. Vinita Singhania, Vice Chairman & Managing Director, JK Lakshmi Cement Ltd
  3. Pushp Raj Singh, Executive Director, Dalmia Cement Bharat Ltd
  4. Nabil Francis, Managing Director, Zuari Cement
  5. Martin Kriegner, Country CEO, Lafarge India
  6. Arvind Pathak, CEO, Reliance Cement
To share your views on the market for Cement and RMC, write in at feedback@ASAPPmedia.com

Notwithstanding flat demand and supply side challenges, cement players are gearing up for better times, discovers CHARU BAHRI.In the cement sector, all eyes are focused on economic recovery. Cement demand in the current fiscal has been lower than the last one as a result of the adverse impact on construction growth of the sand mining ban, non-availability of bricks, delays in regulatory approvals for infrastructure development and a weak real-estate sector.Lacklustre demandAccording to Teena Virmani, Vice President- Private Client Group Research, Kotak Securities, Demand has failed to improve in line with expectations. Core industries data shows that the cumulative growth in cement production during April to November 2013-14 was 4 per cent compared to April to November 2012-13.The cement industry has seen de-growth. However, some growth has been observed in West Bengal, Bihar and Gujarat, says Vivek Agrawal, Chief Marketing Officer, UltraTech Cement Ltd. A difficult macro environment and political paralysis have subdued demand growth, observes Vinita Singhania, Vice Chairman & Managing Director, JK Lakshmi Cement Ltd.Demand for cement has not grown after the monsoons owing to the recessionary trends in the markets, says Pushp Raj Singh, Executive Director, Dalmia Cement Bharat Ltd. Renowned builders are struggling to get strong levels of bookings at project launches because of higher interest rates. Some private-sector projects are going slow because of the impending elections.Demand continues to be flat in with no visible signs of improvement, opines Nabil Francis, Managing Director, Zuari Cement. And Martin Kriegner, Country CEO, Lafarge India, cites slowdown in construction and attracting the right talent to meet customer needs as current challenges.Takers for RMCWhat about demand for RMC? RMC is a ready-to-use product and, contrary to cement, cannot be stored, explains Agrawal. Demand for RMC generates a lead indicator for cement demand. RMC demand is driven primarily by the real estate sector (76 per cent) and is supported by the infrastructure (17 per cent) and industrial sectors. Last year, around 79 per cent of RMC demand was driven by Tier I cities. Demand for RMC has picked up after the monsoon and elections in some states, particularly in the south. However, Maharashtra is still reeling under the pressure from a challenging market environment.Broadly the RMC market follows the cement market, adds Singh. Aggregate shortages, elections and slowdown of other infra projects seem to be having a greater negative impact on demand for RMC and, therefore, on cement demand. Possible growth driversOpinions vary on recovery. Sceptical about demand recovering prior to the elections, Singhania says, Pre-election infrastructure spend may be constrained. Uncertainty about the new government is making companies defer their investment plans. Companies are also banking on an interest rate cut by the central bank in June, which they say will revive home sales and construction.India Research & Ratings (Ind-Ra) expects to see some uptick in demand from 2HFY15 owing to a provision in the Union Budget of 2013-2014 for an investment allowance for infrastructure projects of Rs 1,000 million and above between April 1, 2014, and March 31, 2015. A fractured electoral mandate could, however, adversely impact this revival. In the absence of any major projects unfolding in the upcoming quarters, Amey Joshi, Analyst, India Ratings and Research, expects that rural/semi-rural demand and housing demand from Tier II and Tier III cities will be the key driver of cement demand in FY15. Supported by an expected push from rural cement demand, growth for the sector is likely to be in the range of 5-6 per cent, he says.Another view is that the last ditch efforts of the incumbent government to revive infrastructure development may boost demand in coming months. Virmani says, In the near to medium term, demand is likely to firm up with improvement in rural spending and commencement of work on stalled projects. In a similar vein, Agarwal observes, With elections nearing and as governments make last ditch attempts to depict themselves positively with voters, we expect some movement on large infrastructure projects, which will improve demand for cement and concrete. Seventy projects worth Rs 1.5 lakh crore have recently been cleared by the Ministry of Environment and Forests.Hard trendsLimited construction activity bears upon the industry's recovery prospects and on cement prices. The past two quarters have seen marked price volatility. With key growth drivers conspicuously missing, the construction industry would have welcomed some price reduction. Conversely, cement prices across India have largely charted an upward incline—no thanks to supply side reasons.In spite of sluggish demand for cement, prices have remained firm because of high freight and energy costs,' says, observes Amitava Chakraborty, Vice-President – Procurement and Subcontract, HCC. Prices of imported coal have gone up significantly while the rupee has steeply depreciated.Being a bulk commodity, cement is freight-intensive. The approximate 20 per cent hike in diesel prices and 30 per cent increase in railway freight charges have substantially increased the landed cost of cement. After substantial increases in costs, raw material costs comprise 13-15 per cent of the total cost of cement production while power and fuel costs account for 25-27 per cent, notes Joshi.Worse, all this is happening in the backdrop of sluggish market conditions marked by slow industrial and agricultural growth. Is a turnaround in sight?Challenging timesCement prices traditionally follow a cyclical pattern with prices remaining firm during the construction season and witnessing a decline during the monsoons. In the coming months, Virmani expects prices to firm up during Q4FY14 and remain firm till the onset of the monsoons.Cement prices are expected to be on shaky ground till the elections are over and a stable government is in place, believes Singh. If the new government focuses on employment and infrastructure, there is a likelihood that prices will move north in the latter half of FY14-15.Any price increase will bode well for cement companies, for continued cost pressures are weighing on their profitability. The recent price rise has, however, only offset the impact of cost pressures to some extent, says Virmani, certainly not fully.Escalating costs of diesel and railway freight continue to be sources of worry, says Singhania. Operating margins in the cement sector, which have shrunk by about 5-7 percentage points for many companies, are unlikely to see an improvement in spite of the recent spurt in prices.The profitability of non-integrated players has been affected the most. Worse, because of subdued macroeconomic conditions, Ind-Ra does not expect cement companies to gain the bargaining power to pass on the complete increase in costs to the final consumers.Another dampener that may cause prices to remain relatively stagnant is excess capacity in the industry, owing to the planned expansion of existing players and as a result of newer entrants such as Reliance Cement, ABG Cement and Siddhi Vinayak Cement. Capacity additions are creating a demand-supply imbalance in the industry, bringing down average capacity utilisation levels and augmenting the challenges facing cement companies. According to Singhania, Soon, the industry will have about 99 million tonne per annum (mtpa) of surplus capacity.Long-term growthNotwithstanding the current slowdown, players are positive about the long-term prospects. Italian major Italcementi's subsidiary Zuari Cement is investing in a new 3 mtpa cement plant in Gulbarga, a grinding plant in Solapur and a terminal at Kochi.Lafarge sees India as an important market because of its size and potential. We estimate the Indian construction market to be worth around Euro 300 billion, which is substantial in absolute terms, says Kriegner. Analysis of per-capita indicators for India, when compared to other countries, substantiates that India is at a very ready stage for development. For instance, the per-capita consumption of cement in India is 180 kg vis-à-vis the world average of around 350 kg.In particular, Kriegner believes India's growing youthful population augurs well for the construction and cement industries as the youth aspire for a better quality of life, better housing, better cities and better infrastructure. Affordable housing projects are already being developed across the country, he adds. Further, the government's focus on growth will have to be accompanied by increased spending on infrastructure. Rise in disposable income among the rural masses is also a positive development for the industry.In the long-term, increasing urbanisation will boost demand for urban infrastructure and housing, which, in turn, will boost demand for cement, Agarwal points out. There is latent demand for housing, but interest rates need to soften.Vending stabilityAll considered, construction companies desire some stability in cement prices and supplies. Being an infrastructure company whose major raw material is cement, we seek stability in cement prices over a period of time, says Chakraborty. Prices should ideally be kept valid for a year. As things stand, cement prices change almost every month, which makes it challenging to execute current projects competitively and gain the foresight to procure future business.While he understands why cement companies give preference to the retail sector (being a major consumer) when demand burgeons, Chakraborty feels that he would like to see equal importance being given to the infrastructure sector. To avoid the perils of uncertainty of cement and RMC prices, Sobha Developers has entered into long-term fixed price arrangements with RMC suppliers. Our approach is a sustainable model in the long run, opines Raj Pillai, Executive Director, Concrete Products Division, Sobha Developers.Evidently, there is scope for suppliers to offer buyers long-term contracts for cement and RMC.Innovation ahoyAs the industry develops, Pillai sees scope for RMC to improve in qualitative terms, just as other commodity products. Already many players are using a variety of supplementary cementitious materials like fly ash, GGBS and silica fume in concrete, thus conserving cement and helping to reduce emission of greenhouse gases, he says.Pillai also sees room for the ready-mix industry to focus more on value-added products like high-grade concrete, self-compacting concrete and performance-based concrete. These products can enable the construction of futuristic buildings and can also help RMC players differentiate themselves in the market, he reasons.For its part, Lafarge is focusing on introducing innovative solutions. Its latest offerings include Concrete Master, which enables customers (especially those in congested areas) to order RMC in 30-kg reinforced bags and allows up to four hours of workability before initial setting; Agilia, a self-consolidating concrete which helps in faster concrete placement with minimal cost; and Lafarge Infracem, a high-quality, heavy-duty blended cement best suited for heavy construction work including mass concreting, foundations and heavy-duty RCC work.According to Arvind Pathak, CEO, Reliance Cement, Reliance Cement has introduced new-age UPSD technology that produces cement with high fineness and rapid setting property, which results in high initial strength. This allows our consumers to build long-lasting structures in the quickest possible construction time. Our ultramodern packaging also ensures zero loss to end consumers. The product is also recommended as an alternative to OPC. Meanwhile, Ultratech Concrete has recently started to supply M80 self-compacting concrete: UltraTech Freeflow, a first for the country, and M80 high-grade UltraTech Hypercon.To boost innovation in concrete technology, Agrawal sees the need for existing market-based design specifications for concrete to be revised: These set prescriptions like minimum cement content and specifications like pure OPC concrete only or limiting supplementary cementitious material to 15-20 per cent.For its part, Zuari Cement is offering a range of performance-oriented products from the Global 'i.nova' product range. Its new TX-active and revolutionary 'Transparent Cement' focuses on reducing pollution and offering a new set of innovative applications in concrete.Also, Dalmia Cement with HALC component has seen good acceptance since being launched last year. Singh sees opportunities in pre-cast and special applications cement, areas where we are evaluating having more focused products.Service orientationServices are also emerging as an area of differentiation for major players—with good reason. We appreciate cement manufacturers who offer technical support to achieve economies of scale on cement consumption per cu m of concrete, says Chakraborty.To this end, Lafarge is looking at growth by providing various customer segments with integrated solutions through its network of cement, RMX and aggregate plants. Rather than selling a product at the lowest price, we will be focusing on the end needs of customers, explains Kriegner. Lafarge additionally offers installation services by professional applicators for its new decorative concrete product, Artevia.Safety and operational efficiency have been our key focus in 2013; we aim to reach benchmark competencies in these two areas, shares Francis of Zuari. Our key challenge is to reduce the lead time on all fronts—from customer requisition and production to distribution cycles. With increase in our capacity by 2015 covering larger geographies, we will focus on providing better customer services.It's a no-brainer: for players who are willing to differentiate, opportunities will always abound.Vivek Agrawal, Chief Marketing Officer, UltraTech Cement LtdVinita Singhania, Vice Chairman & Managing Director, JK Lakshmi Cement LtdPushp Raj Singh, Executive Director, Dalmia Cement Bharat LtdNabil Francis, Managing Director, Zuari CementMartin Kriegner, Country CEO, Lafarge IndiaArvind Pathak, CEO, Reliance CementTo share your views on the market for Cement and RMC, write in at feedback@ASAPPmedia.com

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