The Indian cement industry is formulating various strategies in order to maintain its profitability in an adverse market conditions.
For more than three years, overcapacity has shadowed the Indian cement industry and it continues to wait for the good days that it was expecting post the general elections of 2014. Though there are a few signs of improvements, the expectations from the industry are far removed from the ground reality. Right now, analysts are busy crunching the numbers to ascertain the impact of demonetisation. However, in spite of this scenario, a few players are doing better than others. We take a closer look at the numbers to ascertain the actual situaution.
INDIAN CEMENT REVIEW talked to a few consulting firms and industry stakeholders to know why a few cement companies will weather the current storm.
For example, we contacted Boston Consulting Group (BCG), which has been advising many top cement companies like ACC and UltraTech. Amit Ganeriwalla and Rishbh Goel have been studying the cement industry from close quarters, and have expressed clearly the areas in which they have spotted opportunities for the cement industry.
The cost factor
BCG states that as the cement industry goes through the current overcapacity cycle, it is imperative for players to immediately evaluate and implement many cost efficiency initiatives. The advent of advanced analytics and digital tools is helping identify fundamentally new sources of cost optimisation and firms need to invest in building these capabilities internally. A structured cost improvement program leveraging the best of lean methodologies and digital tools can help significantly shore up profitability and drive competitive advantage in these challenging times. Leaning on the traditional levers of ´lean operations´ continues to form the backbone of such efforts, and there is growing awareness and adoption of digital tools which are churning huge amounts of data to help identify hitherto hidden opportunities. Based on BCG´s work with various cement players on this topic, the firm believes there is an opportunity to optimise costs between 10-15 per cent depending on the starting position and level of operational sophistication.
The article further emphasizes on the logistics cost base. It identifies four key levers:
For long, the main effort on freight rate reduction has relied on negotiations with transporters. While that continues to be one of the levers, there is a lot of focus that firms are driving on unlocking efficiencies through the right mix of road vs. rail, maximising direct movement, improving vehicle turnaround, optimising size of vehicles /wagons deployed, etc.
Maximising direct movement of material from plant to customer can significantly impact cost both from reducing extra handling and eliminating the costly secondary leg of transportation from warehouses. With GPS and RFID adoption growing among cement firms, this is soon becoming a ´hygiene´ practice. The most critical lever on logistics however is the optimisation of plant-to-market network. Using latest geo-analytical tools, it is now possible to re-design the warehouse network to reduce the overall logistics cost significantly.
Companies are also optimising diesel consumeption in mines through monitoring devices and analysing usage patterns to spot leakages and inefficiencies. There are also opportunities to deploy variable frequency drives to optimise fixed power consumption in the plants.
Krishna Kumar, an industry veteran, works with a company whose main business is to produce steel and the by-product goes into making of cement. He talks about the levers in the hands of top management - logistics, energy consumption, process engineering and alternate materials.
He says that cement is a bulk commodity that becomes expensive to transport beyond 500 km. Cement players have tried various innovative models over the decades to bring down the distribution cost. One has to look beyond the established models like the hub & spoke model, satellite grinding units and the bulk/packing terminals, all with an objective to optimise the distribution cost. However, these models are now at their saturation limit. Industry needs to look into the next level of innovative models. Kumar talks about a potential innovation which could be moving the bagged cement in trucks mounted with containers and ply it like mobile mini-warehouses to cater to multiple small counters. Though the idea seems weird, it is not an implausible one. The need of the hour is some disruptive innovation; after all, 32 per cent of the total delivered cost is made up of distribution cost.
Fuel and electricity together comprise approximately 60 per cent of the variable cost and form the biggest portion of the feed fuel pie. Many cement players have now substituted close to 100 per cent of the fossil fuels (mainly coal) by pet coke, thanks to the drop in crude prices. Fuel cost in Rs/Kcal with pet coke had a potential to less than that of coal by as much as 30 per cent during the first quarter of this calendar year.
ERCOM is another firm advising cement companies on operational matters. In its article on use of renewable energy, it indicates that there is a transition likely to happen from conventional energy systems. It is a sustainable way to meet the ever-increasing demand for energy.
The article focuses on the recent policies of the government. The cement industry is one of the most energy intensive industries, and energy costs account for a significant percentage (approximately 30-40 per cent) of the total manufacturing cost. The Centre has decided to substantially alter the energy mix that powers India in the future such that at least 40 per cent of India´s total power capacity will come from renewable sources by 2030. This is as per the country´s targets under the Paris climate change agreement.
The cement industry is gearing up for some rough time, but there is some light at the end of the tunnel.