The pioneers of the cement industry provide an overview on the performance of this segment in the past few years. They also highlight the challenges and hope for better growth prospects in the future.
Historically czars were known for their might and superiority. In the cement industry they exist even today in the talented and successful playersin the highly competitive market. The Indian cement industry is dominated by 20 companies which account for over 70 per cent of the market. Individually, no company accounts for over 12 per cent of the market. The major players like ACC, Ultra Tech, Jaiprakash Associates, Ambuja and India Cements have been quite successful in narrowing the gap between demand and supply. The housing sector consumes 53 per cent followed by government infrastructure. However, in the recent times all the leading giants including ACC, Ambuja, UltraTech, have faced a tough time due to the mismatch between demand and supply.
The hike in diesel prices has further worsened the situation as it has increased the logistics cost. Owing to the high input cost, companies like India Cements, reported a dip of 29.5 per cent in the second quarter of FY 2012. It was reportedly stated that only 70 per cent of the clinker facilities have been utilised. In this crisis situation, many of the industry gurus feel that consolidation would be the key solution. One of the biggest examples of the same could be Dalmia, which acquired Calcom and Adhunik Cement in the year 2012. By the end of the year, the company had already secured an additional stake of 25 per cent in the latter and went on to become one of the biggest companies in Northeast India.
Due to low value and high density of cement, its movement is normally restricted to nearby markets. However, cement companies have moved their distribution to far away distances. For instance, Rajasthan based plants supplying to markets like Bihar, West Bengal and similarly, Karnataka and Andhra Pradesh plants supplying to markets of Gujarat as well as Orissa and West Bengal. As far as marketing of cement is concerned, there is no limit or zoning for cement companies.
In FY11, the demand for cement grew at moderate rate of five per cent on Y-o-Y basis. The construction activities remained subdued in FY11 owing to various reasons like prolonged monsoon, heavy winter, delay in execution of infrastructural projects etc. which led to slowdown in cement off take. The dismal performance of the cement industry continued in FY12. The slowdown in the real estate sector and delay in take off of the various infrastructural projects owing to the spiralling cost of capital has hit the cement consumption in this fiscal. During the first nine months of FY12, the cement demand grew at 5.3 per cent on Y-o-Y basis. However, the long term cement demand is expected to remain intact.
The profitability margins of the cement industry have shown some improvement in FY12. Considering the first nine months of FY12, the cement industry has witnessed a marginal improvement despite the rise in cost. In spite of the supply glut situation, the industry was able to pass on the increased cost burden to the consumers on the back of the supply discipline followed by the cement players in this fiscal.
Vinita Singhania, Managing Director, JK Lakshmi Cements said, “After an impressive September quarter, cement companies are staring a muted growth in the December quarter. The dismal demand led to considerable drop in prices. The high interest and slowdown in economic activities contributed to the fall in major consuming segments like Reality and Infrastructure.” Accepting the fact that the cement industry is currently marred due to a steep rise in freight and raw material cost because of the slowdown in demand, she feels that the demand and supply gap contributes to additional challenges.
New year 2013
Commenting on the current scenario of the cement industry, Alok Sanghi, Director, Sanghi Industries agreed that the cement industry is going through a challenging phase. Explaining the situation further, he said, “With an oversupply in the market, the demand is less and slows down further putting some supply and price pressure on cement. We believe that this will continue for another year, after which things will start improving, and if the government policies also take off, the demand should also improve faster.”
Suman Mukherjee, Managing Director and CEO - India, Shree Digvijay, Cement Company, Votorantim Group Company points out, “The Indian economic growth forecasted to be around six per cent for the FY 2012 -13 and is expected to grow around 6-6.5 per cent in FY 2013. However, the October-December quarter had not seen the growth as expected. Cement prices across the country are under pressure. Even as the peak construction period has set in, poor demand and inactivity in the construction space have hit prices.” However, he added that the cement demand is expected to grow in the first half of the year a and as a result the price is expected to rise, which will also ease out the price pressure.
Further explaining the scenario of the industry, K Ravi, Managing Director, NCL Industries, pointed out that the cement industry in India has grown substantially as cement is one of the major elements in construction work. “At present there seems to be a mismatch between demand and supply. Consequently, the present cement prices are not favourable for the industry. We feel that the cement industry will play a crucial role in both infrastructure and housing in the near future. The consumption of cement has also increased gradually in recent times, by over eight per cent.
Demand for cement from the southern part of the country is high, as there have been more real estate and construction activities in that region.” The lack of rain this year allowed construction companies to continue working as usual and this has pushed up demand for cement by more than 10 per cent all over India in the months of October, November and December 2012. Commenting on the situation in Southern India, Ravi elaborated that the market in South has a potential growth as some of the existing and new companies are planning to set up new units in the upcoming years.
M Ravinder Reddy, Head Marketing, India, Vicat Group and Director Marketing, Bharathi Cement said, “As far as demand is concerned probably in 2012, our final total estimate was 250 million tonne. We are expecting an average of eight per cent and if the government decides to spend more money on the coming election, it may even increase. The overall demand of cement was sluggish particularly in South India. And the growth rate was extremely marginal however; the industry grew at five-six per cent.”
The year 2013, according to Sanghi will witness the reduction in gap of supply and demand. “I think in the last year 2012, we were reaching the bottom or probably we have already hit the bottom, thus the only thing that can happen or the only way out is climbing up the ladder. From this year, I feel the supply demand mismatch what is there will reduce and possibly by 2015 we should see that it should be equal.”
Mukherjee added that the industry is expected to add 30-40 million tonne of capacity in 2013.The sector is set to see large scale merger and acquisition. Larger and global cement companies with superior cost position and pan India presence are expected to remain stable in 2013, whereas smaller companies with an unfavourable cost structure and regional concentrations are likely to face tough competition.
Remaining optimistic about the year 2013, Ravi predicts better results in the next two quarters. “The latest market reports indicate that there has been a slight improvement in pricing on account of the recent diesel price hike. Since the construction activity will normally be at its peak from now onwards up to June/July, the cement industry is likely to post better performance in the next two quarters.”
According to Singhania, “As per the new research report by RNCOS, the thrust on the rural infrastructure development is expected to raise the cement consumption in the coming years which would benefit tier II and tier III cities immensely. As a matter of fact, JK Lakshmi Cement is a leading regional player and our maximum profit is driven from the north region. The industry expects the over capacity situation to be balanced out with the rise in demand in the forthcoming quarter as there are heightened activities in the construction sector. As the cement prices would also increase, it would help cement companies to maintain profit margins.” CARE Research estimates the cement demand to grow at a CAGR of 8.3 per cent during the period FY12-15.
The major challenge that the industry is expected to face, is the steep rise in the cost of raw materials and paucity of coal. Explaining the situation further Reddy said, “Earlier we had enough coal to cater to our industry, but now we are dependent on imports from Indonesia, or Africa.” With the logistic cost going high, the industry is expected to face crisis in the upcoming year.
Despite the demand and supply mismatch, cement companies like Dalmia, Bharathi Cements, UltraTech, JK Lakshmi have been adding on to their existing capacity. Since the cement industry is expected to have an upturn, companies have being opting for green field expansions. Dalmia as a Group has decided to increase their capacity by five million tonne, the production is divided into different segments - one million tonne from Calcom, 2.5 million tonne from Belgaum, 1.3 million tonne by OCL split grinding at Medinapur. Similarly, JK Lakshmi also plans green field expansion. VP Sharma, COO, Dalmia Bharat mentions, “It takes time for the capacity to be operational, more than two years is the construction period and six months to one year is the ramp up period for the plant. The company wants to reap the benefits when the cement cycle turns, therefore it is necessary to reap to build now. Our plants will commission by 2015 and it is expected that we would witness a better demand growth by then.” He further added that the capacity expansions are slowing down due to increase in replacement cost and more complicated procedures for approvals. To sum up, though the cement industry is facing a tough time, the cement czars are very optimistic that the industry will once again regain its lost pace
Oh how I wish....
Players of the industry have many expectation from the Union Budget 2013. Indian Cement Review interacted with some of them and listed down their wish list for the same. Singhania expressing her opinion on the upcoming budget said, “I believe, introduction of tax free bonds, formation of infrastructure debt funds and formulating a comprehensive policy for developing Public Private Partnership projects (PPPs) are some of the steps that will provide required stimulus for growth of the cement industry. Also, given the rapidly growing demand for housing from the low middle income population, there is a need to promote low cost housing.”
On the policy level, Mukherjee feels that the impact of government levies and taxes, which includes excise duty, royalty on limestone and coal, electricity duty, clean energy, cess on fuel, vat etc. on cement constitutes about 60 per cent or more of the ex-factory price of cement. VAT is another tax, which is very high on cement at 12.5 per cent, even up to 15 per cent in some of the states, while it is only four per cent on steel. Both steel and cement are two main materials for any construction, so to maintain parity and reduce heavy burden of taxes and levies both can be brought at par.
Singhania further mentions that to encourage the cement industry and bring it at par with other core and infrastructure industries, the excise duty rate should be rationalised from 12 per cent to six-eight per cent. The government should provide a level playing field for the industry; basic customs duty should be levied on cement imports into India. Alternatively, import duties on goods required for manufacture of cement should be abolished and free movement be allowed without levy of duty. Sharma and Mukherjee agree with this opinion. Sharma says, “Also I feel that new policies should focus on spending on infrastructure, particularly the housing sector, which will further boost the demand of cement and will benefit the industry.”
Mukherjee also mentions, “It is also desired that cement be stipulated as ‘Declared goods’ under section 14 of Central Sales Tax Act so that it is put on an equal footing with other core sectors goods like coal, steel, crude oil, jute, cotton yarn etc.” Singhania concurs with Mukherjee on this. Also, the Central Government has made a proposal to the State Government for dual rate under GST which would be brought to single rate over a period of three years. However, Singhania suggests that single rate may kindly be introduced from the first year itself, so that all disputes/litigation towards classification can be avoided from the first year itself.
She also adds that energy cost is a very substantial part of producing cement, both in India and globally. The state governments are imposing renewable energy obligations on the industry and hence, the cement industry is putting up waste heat recovery plants so as to derive more energy from the same energy resource, in a way; this is akin to green energy. All of this requires further capital investments. To help the industry in its endeavour to produce more such environment-friendly energy, it is requested that such energy generation be treated as renewable energy source.
Raw material reserve is another burning issue nowadays. Because of environmental issues even the existing coal mines are coming under restriction to operate. The Government of India should immediately look into it and expedite the procedure of block notification, e-auction and allotment of new mines. Royalty paid on limestone as well as duty/cess paid on indigenous coal can be allowed as credit – either as CENVAT credit or VAT credit to reduce input cost. The Government can also consider waste heat recovery as a renewal energy source.
Mukherjee also adds that the import of coal, gypsum, pet coke etc should be duty free as the duty on pet coke and gypsum is 2.5 per cent, if imported, while there is no duty on cement import. This leads to anomaly in the import duty on inputs is higher than the finished goods. He also mentions that wharf age charges and handling losses on exports of clinker / cements should be considered since such export would earn valuable foreign exchange for the country and make its product competitive in the international market. Also excise duty on a certain percentage of such export as a part of handling loss may be waived.
The Government’s long cherished ‘Dream’ of providing world class standard of concrete roads if adopted on a large scale, will increase cement consumption in the country. Concrete roads are long lasting, maintenance free for 30-40 years and as a result they are also cheap. He further adds, “Government initiatives towards infrastructural and housing development can be a contributing factor towards development of cement industry. The residential support needs to be supported to address the housing need of the public. Measures to bring down home loan rates and bank support for project development needs to be decided. Tax concession for affordable housing and income tax relief.
All the players wil be aniticiapating their wish list come true as the budget will give a new direction to the cement industry.
Managing Director, JK Lakshmi
“The thrust on the rural infrastructure development is expected to raise the cement consumption in the coming years which would benefit tier II and tier III cities immensely.”
Suman Mukherjee, Managing Director and CEO - India, Shree Digvijay Cement Company, A Votorantim Group Company “Smaller companies with an unfavourable cost structure and regional concentrations.”
COO, Dalmia Bharat
“The company wants to reap the benefits when cement cycle will turn, therefore it is necessary to reap to expand now.”
M Ravinder Reddy, Head Marketing, India, Vicat Group and Director Marketing Bharathi Cement said
“We are expecting an average of 8 per cent and if government decides to spend more money on the coming election.”
Managing Director, NCL Industries
“The construction activity will be normally at peak a level from now onwards up to June/July; the cement industry is likely to post better performance in the next two quarters.”
Director, Sanghi Industries
“We believe that this will continue for a year, after which things will start improving.”
UltraTech Cement is part of the US $ 40 billion Aditya Birla Group. The company nearly has 22 cement plants in India with an installed capacity of 52 mtpa and is expected to add 10 million tonne by the end of FY 13. UltraTech’s products include Ordinary Portland cement, Portland Pozzolana cement and Portland blast furnace slag cement. As per the recent reports, the company plans to purchase cement plant in Gujarat owned by ABG Cement. UltraTech will be adding 9.2 million tonnes of new capacity making way in FY14 which will increase overall cement capacity to 62 mt and to increase their presence in the high margin white cement business. For logistical reasons the company has a captive jetty is situated on Saurashtra coast (village Kovaya) between Jafrabad and the port of Pipavav (in Pipavav Port area)
Ambuja Cements is known for its stringent quality control policies. The company recently won the Confederation of Indian Industries (CII) Sustainability Awards 2012. the company has its cemebnt plant in India including places like Ambujanagar Gujarat, Darlaghat Himachal Pradesh, Chandrapur Maharashtra, Bhatapara Chattisgarh and Rabriyawas Rajasthan. Besides, the company has One Clinkerisation Plant at Rauri Himachal Pradesh and eight Clinker Grinding Plants at Ropar and Bhatinda in Punjab, Sankrail and Farakka in West Bengal, Surat in Gujarat, Roorkee in Uttarachal, Dadri in U.P and Nalagarh in Himachal Pradesh.and with a total cement production of 25.0 Mtpa. GACL was one of the first cement producers of the country to introduce an Integrated Logistics System (ILS). At each manufacturing unit, a cross functional committee was responsible for the efficient management of logistic functions.
Jai Prakash Associates
Jaypee group is the third largest cement producer in the country. The groups cement facilities are located in the Satna, Madhya Pradesh. The group produces special blend of Portland Pozzolana Cement under the brand name ‘Jaypee Cement’ (PPC). Its cement division currently operates modern, computerized process control cement plants with an aggregate installed capacity of 28 mtpa. The company is in the midst of capacity expansion of its cement business in Northern, Southern, Central, Eastern and Western parts of the country and is slated to be a 35.90 mtpa by FY13 (expected) with Captive Thermal Power plants totaling 672 mw.
South India’s largest cement maker by volume, India Cements, is the second largest cement market with a capacity of 300 mtpa Recently the company’s profits skidded by 30 per cent due to high input cost. The company’s plants are well spread with three in Tamilnadu and four in Andhra Pradesh which cater to all major markets in South India and Maharashtra. Cement is manufactured under the brand name, ‘Coromandel’. the cement giant has recently got a nod for expanding its capacity from the environment ministry for its cement plants.
ACC Limited is India’s foremost manufacturer of cement and ready mixed concrete with a countrywide network of factories and sales offices. ACC has a countrywide network with over 51 modern plants in major cities such as Mumbai, Bangalore, Kolkata, Chennai, Delhi, Hyderabad, Goa, Chandigarh and Ahmadabad. ACC is the part of Holcim Group. Speedcrete and UTWT 24 are the couple of new innovate products launched by the company. ACC produces OPC 43 Grade, 53 Grade Cement,Fly-ash based Portland Pozzolana Cement and Portland Slag Cement
It presently has a cement production capacity of 13.5 mtpa. It plans to raise it further and as a first step, has already undertaken work on setting up two new Clinker Manufacturing Units of 2 mtpa capacity each at Ras in Rajasthan. A new Grinding Unit in the state of Bihar and an Integrated Unit in the state of Chattisgarh have also been envisioned and pre-project activities are in their final stages of completion.Shree Cements reported an enhanced second quarter performance in the financial year 2012-13 with a 3.67 times upswing in net profit to Rs 217 crore. The company’s net sales propagated by 19.4 per cent to Rs 1428 crore from Rs 1,195.8 crore during the same period. Shree Cements are to run their capacity at 100 percent in the second half and aims to produce 6.75 million tonne in the second half along with 12.8 million tonne of cement and expects growth in H2FY13.
Madras Cements is the flagship company of the Ramco Group, a well-known business group of South India. Headquartered at Chennai, the main product of the company is Portland cement, manufactured in five state-of-the art production facilities spread over South India, with a current total production capacity of 13.0 mtpa. The company has integrated plants in Ramasamy Alathiyur, Ariyalur in, Tamil Nadu, Ariyalur, Govindapuram, Ariyalur District, Tamil Nadu, Jayanthipuram, Andhra Pradesh, Mathodu, Chitradurga District, Karnataka