The expected higher government spending on infrastructure and a robust growth in housing sector will trigger the demand for cement in 2015, a year that is also expected to be another year of consolidation in the industry.
The Indian cement industry is the second largest market after China accounting for about eight per cent of the total global production. It had a total capacity of over 360 million tonne (mt) as of the financial year 2013-14. The industry grew at a rate in the previous decade, registering a compounded growth of about eight per cent. The housing sector is the biggest demand driver of cement, accounting for about 67 per cent of the total consumption, followed by infrastructure - 13 per cent; commercial construction - 11 per cent; and industrial construction - nine per cent. To meet the rise in demand, cement companies are expected to add 56 mt capacity over the next three years. The cement capacity in India may register a growth of eight per cent by end of next year to 395 mt from the current level of 366 mt. It may increase further to 421 mt by the end of 2017. The country´s per capita consumption stands at around 190 kg.
The market scenario
The cement production remained subdued during FY14 growing by a modest three per cent during April-March 2014 as against 7.7 per cent in the corresponding period of the previous year. The cement demand remained weak primarily due to weak demand from end-user industries. Delays in environmental clearances for industrial and infrastructure projects and unavailability of sand in some states contributed to slow growth. In fact, as against year-to-date growth of three per cent, cement production registered an even lower growth of two per cent during Q3 FY14 and 1.2 per cent in Q4 FY14 which are seasonally strong quarters for the cement industry, as per a recent ICRA report.
Companies are taking steps to optimise their overhead costs, improve efficiency and lower consumption norms. They have increasingly started using pet coke and lignite instead of expensive coal as a source of fuel and utilising waste heat gases to produce power. Steps are also being taken to optimise power consumption norms and reduce the power consumed per tonne of cement. Further, companies are focusing on using higher proportion of additives such as fly ash and cement to bring down their cost of production. As a result, the power and fuel cost as well as raw material cost has seen some easing.
Growth and demand outlook
Highlighting the industry scenario, Arvind Pathak, Chief Executive Officer, Reliance Cement Company, had this to say. ´With cement capacity touching ~390 million tonne and likely demand of 275 million tonne in 2015, there is expected to be a surplus capacity of ~115 million tonne during the year. Industry is projected to operate at a rate of 70-72 per cent of capacity utilisation in 2015.´
On the expected CAGR growth, Pathak says, ´With expected pick up in GDP growth rate and considering a multiplier of 1.2, cement demand is expected to grow at the rate of 7-8 per cent during FY15-16.´ On the demand front he observes, ´Demand is mostly expected to come from government-backed projects in 2015. Concretisation of roads, dedicated freight corridors, development of smart cities, metro rail projects, construction of toilets under ´Swacch Bharat Abhiyan´ are the major thrust areas the government is going to focus on which will drive cement consumption from 2015 onwards. Further, with new rules on funding for infrastructure projects under 5:25 rule, and revival of many stalled projects, the overall demand is expected to be high.´ He adds, ´With easing of rules for FDI in real estate sector and the likely reduction of interest rates, commercial and real estate sector are also likely to drive cement consumption.´ According to him, the likely demand mix in 2015 is expected to be housing (60 per cent), infrastructure ( 22 per cent) and commercial (18 per cent).
Vinod Juneja, Managing Director, Binani Group of Industries, ups the growth curve further. According to him, with various projects and expansion plans both by the state and central governments, the cement industry will grow by 10-11 per cent in the coming financial year. The demand will also grow high in the coming years. It is estimated that infrastructure will drive demand in the coming years from airports, highways and railway activities. Juneja adds, ´The National Highways Authority of India (NHAI) has sought to end all its pending issues and litigation regarding land acquisition, cost over-run etc; NHAI and Airports Authority of India (AAI) have got big expansion plans both in metro and non-metro sectors, hence cement market will grow minimum 10-11 per cent.´ He further adds, ´The decrease in the housing loan interest rate and the increase in the tenure of the loans repayment will further boost the cement sector leading the cement industry to a sunshine industry.´
VP Sharma, Managing Director & Chief Executive Officer, ABG Cement, confidently avers, ´I am bullish about cement demand going high. The important sectors which will drive the cement demand are infrastructure and housing. The various initiatives taken by the present government, particularly in the areas of concrete roads, railways, ports, smart cities, and low-cost housing will drive the demand. Towards the end of 2015, demand for cement should be close to 8-9 per cent, which will become double-digit by the end of 2015.´ Sharma adds, ´The year 2015 will see excess supply of cement to the tune of 50 to 60 million tonne. But consistent increase in demand will help us to absorb excess supplies going forward.´
Sharma cements the arguments, ´From the time the present government came to power, they have emphasised on building the infrastructure, i.e., concrete roads, railways, ports and low-cost housing. This will certainly increase cement demand. Recently, the Minister for Road Transport and Highways and Shipping, Nitin Gadkari quoted that all central road projects will be done by concrete. This would result in increase in cement demand.´
Zeroing on the demand scenario, Ashutosh Rampal, Vice President, Marketing, KJS Cement, Maihar, says, ´The cement demand in FY15-16 will be driven by government spending on public infrastructure, in spite of the newly elected government´s pressing need to curb fiscal deficit. This has been clearly stated policy line. Private enterprise has a low share in nation building and the much touted Public-Private-Partnership (PPP) has not gathered mass, thanks to the economic downturn and policy paralysis of the UPA government. Public infrastructure spending by the government is expected to lead the growth in cement consumption in FY15-16, till the PPP model becomes robust and the private companies start taking interest in the infra projects. Retail housing off take was sluggish last year due to high interest rates and fragile economic stability. This is expected to change for better in FY15-16 due to relaxation of land utilisation norms and easing interest rates. The ambitious NCR-Kandla industrial freight corridor is awaiting rejuvenation by Japanese funding who in turn are treading cautiously due to ambivalence of Indian Babudom. To conclude, the industry will do well subject to the government taking effective steps to rev up the system.´
Highlighting the ground reality, Rampal adds, ´The NDA government has promised government expenditure on building public infrastructure as a means to boost the income generation in the economy. In addition to this, the easing of land acquisition norms for key infrastructure projects and government focus on manufacturing and infra industry is expected to boost the demand scenario. Since no significant new capacity is coming up, the year is expected to be good for cement industry.PPP projects are stuck because of cost escalation and poor availability of long- term low-cost funds. Renegotiation of stalled PPP infra projects, especially those of NHAI and take off of Indo-Japanese NCR-Delhi-Kandla freight corridor require urgent attention to boost the cement and steel consumption across the country.´ The demand outlook for FY15 remains relatively more favourable given the new government´s focus on revival of infrastructure and investment spending. The growth in FY15 will also be supported by a low base as cement production grew by merely three per cent in FY14. During April-May 2014, cement production has grown by 7.7 per cent YoY as against 3.9 per cent in the corresponding period last year. Pick-up of real estate and industrial activity, infrastructure projects and overall investment cycle will remain critical for the sector over the near-term.
As per ICRA report, the initiatives announced to promote infrastructure and housing investment in Union Budget are likely to have a positive impact on cement demand. Increased provision under Rural Housing Fund and interest deduction on housing loans will boost urban and rural housing demand and in turn, demand for cement. Further, government measures to promote investment in ports, roads, airports and other infrastructure projects are also likely to support cement demand. Cement companies are also likely to benefit from the increase in long term funding availability for infrastructure projects which is likely to facilitate more investment in these sectors.
2015: A year of further consolidation
According to Sharma, 2015 will be another year of more consolidation in the cement industry. He says, ´The bigger players will look for consolidation as we have seen in 2014 to have better price control. The prices may stabilise towards end of 2015. Our company will work towards increasing the capacity utilisation rather than any capacity addition in the present circumstances. However, based on market scenario, we may look towards end of 2015 for any capacity addition.´
Pathak also is on the same page. According to him, consolidation in cement industry will continue with non-serious and marginal players exiting the market and entry of large multinational cement players. He adds, ´Our current plan of capacity expansion of 10 million tonne is on track (5 million tonne in Maihar, Madhya Pradesh and another 5 million tonne in Yavatmal, Maharashtra). This will take our total installed capacity to 15.5 million tonne. However, immediately in 2015, there is not going to be any new capacity addition.´ Pathak further adds, ´With increased focus of the government on infrastructure and real estate development, demand is expected to be better in 2015. This, coupled with slowdown in capacity additions, will enable industry to pass on cost increases and boost profitability.
Says Rampal, ´I clearly see consolidation of industry. The quality players will take over the smaller inefficient and high-cost players with weak cash flows. Ultratech Cement, Shree Cement and Bharat Dalmia Cement will straddle the space of mergers and acquisitions. Allocation of coal blocks and increased capacity utilisation of government undertakings will help reduce the manufacturing costs. FY15-16 will see a fillip in demand and the market prices. This in turn will create enterprise value and bolster balance sheets for cement companies.´ He adds, ´We are planning to increase capacity to 5 mtpa shortly by adding another 2.10 mtpa clinkerisation unit at Maihar with forward grinding units in Bihar, Odisha and Uttar Pradesh. By this time, our own railway siding would be functional, thereby helping us in evacuation of cement.´
During the past two years the industry witnessed high operating costs, including all major cost heads such as raw materials, energy and freight. The steep depreciation of the rupee and hike in rail freight and diesel prices further aggravated the concerns. Cement manufacturers still continue to be under the pressure of rising input costs. According to ICRA report cement manufacturers witnessed significant increase in freight costs over the past two years, due to increase in freight rates by railways, consistent increase in diesel prices and increased dependence on costlier road transport due to shortage of railway wagons. Apart from this, the prices of key raw materials limestone and gypsum have also increased. Further, increase in domestic coal prices by CIL in May 2013, declining availability of low cost linkage coal have increased power and fuel costs. However, declining international coal and pet coke price have provided some benefits to Indian cement companies; but the extent of this benefit has partly been offset by rupee depreciation.
According to Rampal, cement prices directly depend upon three parameters: the capacity expansion that disturbs the equilibrium of demand-supply in a region; the quality of players; and the difference in variable cost of production of players. He says, ´Firm prices and the capacity utilisation of 85-90 per cent in FY15-16 is expected to stay for next 2-3 years.´
Pathak explains, ´With demand picking up and rate of new capacity additions slowing down, industry would be able to pass on the cost increase to consumers and cement prices are likely to grow in the range of 5-7 per cent in 2015.´
In many regions prices have gone over Rs. 300 per bag. Says Juneja, ´Cement prices have already reached above Rs 300 per bag which includes excise, octroi, sales tax, primary and secondary transportation and handling charges.´ Sharma observes, ´There will be pressure on the prices as in the past. However, focus will be to keep the current price stable and increase volumes.´
From the dealers point of view, Rahul Gandhi, Director, Mahaveer Building Material, had this to say. ´Currently, the basic issue is the price, which has gone up drastically in the last couple of months. At the same time, there is no change in sales margins. The government has to introduce some policy initiative by setting a minimum earning margin for the dealer and the margin should be according to the price, if the price is increased, the margin should be revised accordingly. This will help the dealer stay in the business in difficult times. GST will be a good initiative as the anomalies in tax structure will go and it will be uniform.´ Ravi Lunawat, Partner, Lunawat Agency, supports the view. According to him, from the government, GST is a major initiative everybody is waiting for. He says, ´Last year when LBT started, it reduced the business of dealers in cities because that time the market was closed for almost two months and the builders bought cement from other markets. Once the GST starts, the price will be uniform everywhere, which will be good for us.´
SR Agarwal, Proprietor, Kirtee Enterprises is also on the same page. ´The Central government´s initiative to introduce GST is a good move for dealers,´ he says. He further explains, ´Before LBT, the rate of cement in the rural area was different from city areas, which makes a difference of Rs 10-20 per bag. And now after the authorities upgraded octroi to LBT, the transport system is very fast and the material handling is also very easy. And the material is distributed at the same rate in the rural and urban areas. GST will definitely make the difference as it will benefit the complete value chain of the company, trader, transporter and the end-user. The overall procedure will be transparent.´
According to ICRA report, cement prices in North India had seen a significant hike of Rs 50 per bag during Q4 FY14, driven by temporary supply side disruptions following closure of two cement plants of Binani Cement with a total capacity of 6 mtpa in Rajasthan. The average wholesale cement price in Delhi increased from Rs 275 per bag (50 kg) in January 2014 to Rs 323 per bag in March 2014. Similarly, the average wholesale cement price in Chandigarh increased by Rs 58 per bag between January-March 2014 to Rs 334 per bag. The prices in certain parts of Western India, particularly Gujarat, were also impacted by the aforementioned shutdown. Wholesale prices in Ahmedabad market increased by Rs 47 per bag to Rs 300 per bag between January-March 2014. However, cement prices in these regions came under pressure in April-May 2014, following resumption of cement supply from Binani. Wholesale prices declined by Rs 15-30 per bag in Delhi, Ahmedabad and Chandigarh between April-June 2014. Prices in Mumbai market continued to remain under pressure and declined by Rs 20 per bag during January-May 2014 due to transfer of cement from Southern markets. However, with rise in prices in South in June 2014, the wholesale prices in Mumbai also increased by Rs 5-10 per bag in June 2014. Cement prices in Eastern markets increased by Rs 20-25 per bag during January-June 2014 as cement companies raised prices in the busy season to recover the rising costs.
South India remained the only major region which saw consistent decline in prices by about Rs 10-30 per bag during January-May 2014 due to overcapacity, disruption of production discipline and low demand during April-May 2014. However, cement companies raised prices significantly by about Rs 70 per bag in June 2014 to pass on the rising costs. However, the real estate companies and builders association have protested against such a steep price hike. During April-June 2014, the average price in Delhi was higher by 10 per cent, 22 per cent higher in Ahmedabad, 7 per cent higher in Chandigarh as compared to prices in the corresponding period of the previous year. Prices in Mumbai are flat while those in South and certain parts of East India are lower on YoY basis.
Rampal spells out the expectation from the government. He says, ´NDA government is already sending out message that it wants to kickstart manufacturing to facilitate the growth of labour income. Simplifying land acquisition, labour reforms and simplifying federal taxation through implementation of GST across the nation are the steps industry has already welcomed. Specifically, for the cement industry, the government spending will directly increase the cement demand, followed by take-off of retail housing and PPP infra projects. Government must analyse and find cure as to why infra companies are exiting from the BOT to EPC models. Is the policy environment or the trust missing for the private capital to consider incubating in these projects?´ He adds, ´The Railways can facilitate the industry through preferential allocation of cement rakes (at the factory head) and raw material rakes (at the ports).´
According to Pathak, for increasing demand curve post initiation of different initiatives, government should now focus on implementation of its dream projects like 100 smart cities, bullet train and metro rail projects, house for every citizen by 2022, concretisation of national highways, etc, which will drive cement consumption. He further points out, ´To attract investments in railway infrastructure, government need to review the ´Own your Wagon Scheme´ and make it more attractive for the industry players. Enough focus should be given to develop inland waterways, which would reduce the burden on existing rail and road network and also bring down the logistics cost.´ As far as availability of power is concerned, Pathak adds, ´The government needs to focus on resolving the issues being faced by power sector by bring in clarity on coal auctioning, land acquisition bill, etc. A lot of power projects that are stuck/stalled due to various issues should be revived.´
Speaking on the issues related to different tax and lack of uniform tax structure, Pathak says, ´Cement is one of the highest taxed commodities in India. The total taxes and levies include royalties and import duties on input materials, electricity duties, sales tax, and excise duties account for one-third of the overall price of cement. Taxation rates in India are almost double of China. Government needs to focus on resolving raw materials and logistics issues to help cement sector getting clarity on policies. Clear roadmap for improvement in infrastructure sector is needed to help generating cement consumption in the country. Implementation of GST should start with more clarity on tax structure. The government should also reduce some of the taxes by providing it a status of core infrastructure sector.´
Explains Rampal, ´Out of the market price of a bag of cement 35-40 per cent is taken away by VAT, excise and railway freight (cost of manufacturing and limestone being extra) putting a massive burden on the industry. In spite of being a priority sector for nation building, cement taxation in the country is at par with the prohibitive industries worldwide.´ Rampal suggests, ´Reduction in excise duty by 3-4 per cent will be able to sustain the industry longer. Government should study the possibility of subsidising rail freight for food, cement and steel which will directly boost the movement and clear up all logistics bottlenecks in addition to keeping the inflation of essential commodities low.´
Juneja avers, ´Until and unless GST is implemented, there cannot be effective interstate movement due to cascading effect of multiple taxes. We are awaiting the Budget on 28 February 2015.´ Sharma mirrors the observation. According to him India is one of the countries where there is higher tax structure in cement sector. Government has to rationalise excise duty, royalty and sales tax to help the sector to grow.
Raw material availability
According to Rampal, raw material availability of coal and gypsum is not a constraint. However he adds, ´The limestone availability is fast becoming a constraint as applications for mining lease for limestone are stuck either at the state level or at the central ministry level due to environmental or social impact assessment issues.
Government must speed these up through e-governance initiatives.´ Says Sharma, ´I don´t see much action from the present government in this area; however, cement industry has to improve its raw material inventories, particularly limestone. Moreover, government has to speed up with coal block allotments.´
Sharma further adds, ´With increase in demand, pressure will be on logistics. We are yet to see action from the new government in this area.´ As far as the availability of power is concerned, he says, ´Most of the cement plants are self-sufficient in power with captive power plants. We will require continuing import of coal due to the current uncertainties in the domestic coal supply. Cement industry is importing coal also due to favourable coal prices.
However, the industry has to focus more on alternative sources of power from waste heat etc to reduce energy cost.´
Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. With the Government of India providing a boost to the infrastructure and various housing projects coming up in urban as well as rural areas, the cement sector has enough scope for development in the future. The weakness in the international crude oil prices and other commodities should help bring costs under control and improve profitability of the sector. If inflation comes under control, a likely lowering of interest rates would be a big positive for the cement sector. Despite the current challenges that dent the growth of the industry, the long term drivers for growth remain intact. Higher government spending on infrastructure, robust growth in rural housing and rising per capita incomes are likely to augur well for the cement sector.
Agith G Antony
Government needs to review the ´Own your Wagon Scheme´.
Develop inland waterways, which would reduce the burden on existing rail and road network.
GST implementation should start with more clarity on tax structure. Government has to speed up with coal block allotments.