Cement is never used as cement alone but is always converted to a value-added product in practice. Therefore application of cement becomes extremely important. The cement producers have a dedicated department that looks into the applications of product. Now onwards, we shall try and cover it through a series of articles in a structured way.
India is the second largest cement producer globally and is a vital part of the economic development, providing employment opportunities to more than a million people, directly or indirectly. Since its deregulation in 1982, the Indian cement industry has grown at a tremendous pace attracting huge investments – both from domestic as well as foreign investors. The industry has added over 110 MT of capacity in the last five years.
However, the financial year 2017-18 has been a relatively tough one for the industry due to ban on sand mining, use of pet coke and diminished market concentration of industry leaders. Slower progress in infrastructure projects and low offtake from housing and industrial users also slowed down the growth. A number of foreign players are also eyeing India’s cement sector, owing to high margins and steady demand.
The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70 per cent of the total cement production of the country. A total of 210 large cement plants account for a cumulative installed capacity of over 350 MT, with 350 small plants accounting for the rest. Of these 210 large cement plants, 77 are located in the States of Andhra Pradesh, Rajasthan and Tamil Nadu.
Due to increased construction and infrastructural activities, which has led to growth in demand, cement industry has seen major consolidation and large investments in recent years. During the year, UltraTech Cement acquired Jaypee Cement while Orient Cement took over two entities – Bhilai Jaypee Cement and Nigrie Cement grinding unit. An improvement in utilisation rates of the newly-acquired capacities and fresh capacity additions by these players has led to higher volumes.
The construction market
India’s construction value of output stands over at Rs 26,500 billion and has been slowly expanding over the years. With value addition close to Rs 10,000 billion, its share in total GDP rose from 5.6 per cent in 1990-91 to over 7.3 per cent in 2017-18. However, the growth of construction activity has slowed down significantly in recent years but picked in 2017-18. The last highest yearly growth of 10.8 per cent was recorded in 2011-12, but thereafter it has not even touched 5 per cent until now. In 2016-17, it is estimated to have increased 1.3 per cent and rebounded to 4.3 per cent in 2017-18. Going ahead, it appears that the growth will remain under 4 per cent, thus will result in slower increase in demand for construction materials including cement. However, the growth will largely depend on the government’s initiative in developing the infrastructure and the process of boosting the housing sector.
In construction, cement is the second largest component, although its value accounts for only 12.5 per cent of total input cost of construction, whereas steel takes away nearly half the cost of inputs. Over Rs 2,100 billion worth of cement is consumed to construct a variety of structures over the past three years. Under this premise, dwelling construction accounts for 27.5 per cent of all construction activity, while another 40 per cent is accounted for non-residential buildings construction. Roads and bridges, which is the major infrastructure component, accounts for just 6.4 per cent of construction. The remaining is other structures and land improvement activity. Thus, housing and commercial construction is the major economic activity and is largely dependent on cement and steel. According to estimates, housing sector accounts for about 67 per cent of the total cement consumption while infrastructure makes up for 13 per cent of the consumption in India.
Cement industry performance in 2017-18
Cement production volume in 2017-18 grew 6.3 per cent year-on-year after a decline of 1.2 per cent in 2016-17, for the first time in 15 years as demonetisation reduced demand. The industry with an estimated capacity of about 465 million ton (as of December 2017), saw production grow 3.8 per cent per annum during the period 2012-13 to 2017-18. With no authentic data available on cement consumption or demand, it is assumed in this report, that production will be a proxy to consumption since ending stocks are negligible.
The cement industry witnessed a revival during 2017-18, backed by government spending on infrastructure. Construction of houses under the ‘Housing for All’ scheme and Pradhan Mantri Awas Yojana (PMAY) have been major drivers of demand from the housing segment especially in the rural areas. Infrastructure projects under Bharatmala, Sagarmala and smart cities continued to drive demand from infrastructure segment.
The real estate sector witnessed disruption in the construction and sales activity beginning demonetisation exercise in November 2016. The disruption continued with builders taking a cautious approach to RERA implementation, temporarily halting new sales or construction. Implementation of RERA in May 2017 impacted the demand for cement from real estate segment in first and second quarters of 2017-18.
Cement prices remained range bound in the past four years. They are mainly driven by regional capacity, utilisation levels and demand within the region. The price variation across regions contract when there is steady demand from both retail and institutional cement consumers. Western and eastern regions with favourable demand continue to record higher price for cement.
Prospect for 2018-19
Cement demand has a very close linkage with economic growth and government spending. Demand for housing is driven by income growth while infrastructure development largely depends on government expenditure, both state and central. In recent past, demand for cement has remained poor as the economic growth slowed down to less than 7 per cent between 2012-13 and 2016-17 from an average of 9 per cent between 2005-06 and 2010-11 when cement demand had expanded by 8.5 per cent per annum. Considering that economy will grow between 7 to 8.25 per cent in the next five years, the statistical relation between cement demand and economic growth, predicts that cement demand will grow at the rate of 3.6 per cent per annum during the period 2018-23. In 2018-19, demand is expected to rise 3.8 per cent assuming GDP grows 7 per cent and overall construction activity expand 5.2 per cent during the year.
However, large cement companies are bullish on economic growth in 2018-19 and well as on the cement industry. This was largely evident from the developments in the last quarter of 2017-18 and early 2018-19. After a prolonged lull in demand, volume growth picked up pace, buoyed by government spending on infrastructure projects; but prices are far from their historic levels. Cement prices took a hard knock in the seasonally strong March quarter of 2017-18.
Care Ratings observes that demand for cement from housing and real estate sectors is expected to grow by around 7 per cent, and from infrastructure by 8 to 10 per cent. The demand from affordable housing is expected to sustain on the back of the government allocating Rs 6,500 crore for urban housing. Completion of the same would lead to an incremental demand of 1 to 1.5 per cent (3 to 4.5 MT) for cement in 2018-19. Additionally, the monsoon forecasts for the year indicate normal rainfall, which should lead to sustained demand from rural housing segment.
Similarly, infrastructure segment may continue to remain in focus during the year as far as demand for cement is concerned. Development of national highways is expected to contribute 2-3 MT of incremental demand for cement.
Demand from various projects at proposed smart cities and under-construction metro rail projects at various stages of development in 14 cities are some of the projects expected to drive demand for cement during the fiscal 2019. The development of the above-mentioned projects across the geography is expected to improve capacity utilisation of cement plants across the five regions. Election in some of the key states in southern, northern and central regions followed by the general election in 2019 would ensure faster implementation of sanctioned projects. The infrastructure segment is expected to grow by 8-10 per cent, the analysis added.
Increase in pet coke prices in the global markets and global crude oil price has been leading to increase in domestic diesel prices would impact operating margins of major players during 2018-19.
Availability of sand is a major challenge globally which affects construction activity. India has been facing acute shortage of sand across states especially in northern and southern region. Even though sand seems to be an abundant resource, the availability of sand required for construction is scarce in these regions. Sand is largely illegally mined across many of the states in southern and northern regions, and the respective state governments have been trying to curb the same, in order to boost their tax revenues. This has led to a sudden drop in sand availability for construction.
In 2018-19, capacity addition of around 8-10 MT is expected in eastern and western region. Central, northern and southern regions combined are expected to add about 10-15 MT of production capacity. Revocation of the sand mining ban and acceptance of manufactured sand, popularly known as M-sand in various region, is expected to aid construction activities. It is expected that in order to meet rising demand, cement companies will add 56 million ton capacity over the next three years.
With two major states (Rajasthan and Madhya Pradesh) going into assembly elections followed by general elections in first and second quarters of 2019, the demand from infrastructure and construction is expected to peak in central, eastern and western region. Utilisation in cement capacity across regions is expected to improve during the year to around 67 per cent from 65 per cent in 2017-18.
What large companies expect this year to be
ACC expects GDP growth, primarily fueled by consumption, to touch a respectable mark of 7.5 per cent in 2018-19, up from 6.5 per cent in the previous year. Budget initiatives are expected to raise the rural demand and bolster economic growth with initiatives such as Minimum Support Price (MSP) for farmers set at 1.5 times the cost of production, export impetus on agri-produce, increased allocation of Rs 14.4 lakh crore for rural housing and infrastructure and a 26 per cent increase in funding to the Pradhan Mantri Krishi Sinchayee Yojna (PMKSY). Additionally, private consumption expenditure is expected to increase with the implementation of the Seventh Pay Commission hike at the State level.
Demand for cement in 2018-19 is expected to increase from 6-7 per cent with continued government’s focus on rural development, affordable housing, smart cities, as well as infrastructure by laying thrust on construction of cement concrete roads, highways through its “Bharatmala Project”, one of the biggest highway construction project. This also includes economic corridors’ development, coastal and port connectivity roads, border and international connectivity roads, expressway etc.
However, the cement industry is grappling with sub-optimal effective capacity utilisation of 70 per cent, with capacity overhang of more than 100 million ton. While cement plants in the northern, central and eastern regions of the country produced at levels above 85-90 per cent of capacity, excess capacity in the southern region has inhibited the industry’s average capacity utilisation. Intense competition and not enough demand pull, will continue to lead to excess capacity in 2018-19. However, this situation is expected to correct itself in 2019 with the increased outlays on housing, infrastructure development and agri-sector initiatives.
The five-fold increase in the outlay on Pradhan Mantri Awas Yojana - Urban (PMAY-U) to Rs31,500 crore, is expected to revive urban housing demand, while generating a 30 per cent share of the overall demand for cement. Infrastructure development outlay for highways, roads and railways has increased by 11 per cent and 22 per cent respectively. This will boost demand for cement from the infrastructure sector, which is estimated to account for 20 per cent of cement demand. A social welfare surcharge of 10 per cent, will replace the existing 3 per cent education cess on customs duty, which will marginally inflate the cost of imported inputs such as petcoke and non-coking coal products.
According to Gujarat Ambuja Cement, 2018-19 will be a year of growth, which has been rightly endorsed by the World Bank. According to the World Bank, when compared to other emerging economies, India has an “enormous growth potential” with the implementation of comprehensive reforms. Key indicators across the economy have shown positive rebounds and there is hope that the upward trajectory will continue in the new fiscal year to help achieve a GDP of +8 per cent for the years to come.
However, it also pointed towards major challenges that can impede cement growth. The industry is dependent on natural resources and is highly energy intensive. Natural resources like limestone, coal and minerals are essential to produce cement. The industry needs to ensure the uninterrupted supply of these materials at an optimum cost and quality, however due to the depletion of reserves, this is becoming challenging. Volatility in the price of coal is also an area of concern for the industry. The quality of raw material additive and mineral gypsum is also depleting.
Nevertheless, with an improvement in the economic scenario, immense potential is being offered to the cement industry by the infrastructural, commercial and housing sectors.
UltraTech Cement is bullish on the growth prospects for the cement industry as the government goes big on roads and metro spendings. Reportedly it said that cement demand in the country could well grow by about 8 per cent in 2018-19, led by government spending on infrastructure. With bulk of demand is being generated from infrastructure spending, roads and metro are driving this growth.
The government plans banning burning petroleum coke as a fuel nationwide to comply with a Supreme Court request as part of a long-running case to clean the country’s air. A refinery by-product, petroleum coke, or pet coke, is used as a fuel because of its higher energy content than coal, but it releases larger amounts of carbon dioxide and sulphur dioxide, which can cause lung disease and acid rain.
The ongoing consolidation in cement industry has changed the supply dynamics. Competitive intensity remains high as some regional firms are venturing into newer markets and some of them are on a capacity addition spree. So cement makers will be chasing demand growth at the expense of prices. And the trend of depressed prices may not reverse in near term.
- NITIN MADKAIKAR