At a time when major industries have been hit by the economic slowdown, cement's upward growth trajectory has led to major foreign players entering the Indian market, discovers SHRIYAL SETHUMADHAVAN.
One more year to go and India's cement sector will enter its centenary year. As believed, the country's first cement plant was set up in 1914 in Gujarat with a capacity of 1,000 tonne per year. Today, India is the second largest producer of cement - after China - and has a world share of 6 per cent in production. While the world average is 350 kg, India's per capital consumption is 170 kg and China's is 660 kg (~3.8 times India). However, while the Twelfth Five-Year Plan (2012-17) made the year look smooth for this sector, the Competition Commission of India (CCI) triggered a penalty of Rs 67 billion on India's top cement makers. Despite this detrimental beginning for the Plan, cement being the most basic construction material, the industry seems determined to grow.
Growth driver
While it took India eight decades to reach the first 100 million tonne, it accelerated to the second 100 million tonne in just one decade. But did the economic downturn affect growth in recent years? "Economic downturn, construction slowdown and extended monsoon have had an impact on growth," answers BK Singh, Senior Executive Director-Group Marketing & Corporate Communication, Dalmia Bharat Group. "Yet the current capacity utilisation is at about 74 per cent."
This cyclical sector correlates to the country's GDP as well. As AK Jain, Technical Advisor, UltraTech Cement, says, "If our GDP is growing at 6 per cent, this industry may be at around 7 per cent." Hence, despite a slowdown in its growth rate (FY11 at 4.7 per cent and FY12 at 6.2 per cent), the sector is likely to grow at a healthy rate of 8-9 per cent in the medium to long term, avers Singh. "Also, during the Twelfth Five-Year Plan, it is projected that India will require 480 mt cement, an addition of 150 mt in capacity. There has been a quantum jump in government spending on infrastructure, US$ 1 trillion in the Twelfth Plan." This along with an expected rise in the retail and hospitality sectors will further boost overall demand.
However, the biggest demand driver still remains housing, which contributes to about two-thirds of total demand. Also, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Indira Aawas Yojana are seen as key contributors. "JNNURM has initiated low-cost housing in urban and rural areas and this has lead to an increase in cement demand," says Jain. Hence, as Singh shares, the current split is estimated as 64 per cent of demand coming from the housing sector, 17 per cent from infrastructure, 13 per cent from commercial and institutional and 6 per cent from the industrial segment.
Challenges faced
Along with constant demand, this sector has faced its own set of challenges. According to some manufacturers, the biggest challenge is transportation. "Cement is a bulk commodity and transportation infrastructure, such as roads, transportation by train and means to reach remote areas, need to be improved," Jain suggests. Also, over-taxation is an issue. While VAT on a material like steel is 4 per cent, for cement, it's more than 12 per cent. Other challenges also include fluctuations in exchange rate and hike in diesel prices. Key inputs such as limestone, gypsum and sand are not easily available. "Good-quality limestone and consistent supply of coal are required and this can affect cement cost and production schedule," says Jain. Another major issue the industry faces is power shortage. According to Singh, "To avoid this, large plants have now started installing captive power plants to ensure consistent supply and control cost."
User speak
While manufacturers showcase a positive picture, here is the twist. Cement depends on sand. And as natural sand has been banned, the industry is dependent on crushed sand. Is this trouble calling? B Seenaiah, Managing Director, BSCPL, and National President, Builder's Association of India, says, "Manufacturing crushed sand is time consuming and as natural sand is banned, many projects get stuck at the environment clearance level." He points out the fact that the entire industry has slowed down owing to government policies. "When construction work on projects awarded does not begin, cement is bound to suffer." In terms of supply, he adds, "Today, India has a production ca¡pa¡city of about 300 million tonne per annum. However, the country is producing only 150 million tonne. Despite demand, a shortage in supply is being created."
Moreover, whether it is roads, airports, seaports or power, construction has slowed down in many areas. The reason: an increase in cement prices. "When you require cement, you need to buy it, whatever the cost may be," avers Seenaiah. "While we quote for a tender, the calculated price is different from what it will be when the cement is purchased for the project. However, the current cost varies from Rs 200 to Rs 300 per bag and we only see this increasing in future."
To overcome this problem faced with cement supply and cost, the Builder's Association of India is trying to make each state a unit and buy the material in bulk. As Seenaiah shares, "We have negotiated with a cement company in Andhra Pradesh to supply this material in Chennai, Bengaluru and Hyderabad; the price is fixed. All builders will send their requirement to the Builder's Association and we will buy cement on their behalf." In this case, it is a win-win situation. "As cement companies do not have a trade commissioner, they reduce the cost per bag by Rs 30-40."
The world steps in
All said and done, cement produced in India is said to be of high quality. The industry has undergone substantial changes not merely in technological development but in terms of composition and structure. Following this upward growth trajectory, big-ticket foreign direct investments have led to renewed consolidations in the domestic market. Notable amongst these are the hiving of Larsen & Toubro's cement business into the Aditya Birla Group and consolidating of the latter's cement operations into UltraTech Cement; Heidelberg Cement buying out Mysore Cement and part of Indorama Cement Ltd; Italcementi buying a stake in Zuari Cement Ltd; Holcim Cement acquiring a stake in Gujarat Ambuja Cements, now named Ambuja Cement Ltd; Holcim Cement acquiring a stake in ACC; and Lafarge India, a subsidiary of France's Lafarge Cement Company, being set up after acquiring the cement plants of Raymond and Tata Steel.
"These players account for about one-fourth of the total capacity," says Singh. While Jain agrees that major foreign players have entered the market and are trying to increase their share here, he firmly says, "This does not directly benefit the cement industry or the consumer because cement is a local product and its use depends on construction practices."
Expansion plans
The cement industry has not augured well in the past two years as it has in the preceding years. The fiscal ending March 2013 is also likely to be a subdued growth year. Nonetheless, companies continue to expand. With its recently announced Greenfield sites in Belgaum, Karnataka, Dalmia Bharat Cement recently entered the Northeast, a relatively unexplored area and amongst the undersupplied markets. Players like Heidelberg Cement, UltraTech Cement, ABG Cement and Cement Manufacturing Industry are expected to take total cement capacity addition plan to 21.2 mt by the end of 2013.
Some companies are optimistic about their expansion plans. For instance, Heidelberg Cement's investment of Rs 1,200 crore to Rs 1,250 crore will increase its grinding capacity from the current 3.1 mtpa to 6 mtpa. However, the industry - in the middle of its investment phase - is likely to be plagued by overcapacity this year, according to Crisil Research. Despite weak demand, which may result in a fall in capacity utilisation, the long-term story of this industry remains intact.
Green cement
Green cement is a mixture where you reduce the clinker content in cement and utilise more industrial by-products or industrial and agricultural waste. The industry has been using substitutes of limestone. Indian power plants generate about 130 million tonne of flyash and steel plants make 13 million tonne of blast furnace slag. The cement industry has been using 35 tonne of flyash and 8 million tonne of furnace slag, thereby helping to reduce pollution. "This is one way to produce green cement," Jain says. "Also, optimisation in the plant, reduction in the power and fuel for production in cement, etc, are considered environment-friendly." Further, companies like Dalmia are part of the Cement Sustainability Initiative Forum under the World Business Council for Sustainable Development in Geneva. As Singh informs us, "We contribute to environment cleanliness by using hazardous materials. Alternate fuel programmes like using municipal waste are also an area of focus." The company's railway sleeper cements have helped Indian Railways save lakhs of trees by replacing wooden sleepers with cement concrete.
