Bumpy ride on a cemented road
India's cement industry is the second largest in the world, in terms of production, with over 8 per cent (502 million tonnes per annum in 2018) of the global installed capacity and generating employment for over 1 million people. Unfortunately however, this production does not fully convert into consumption as the demand-supply situation is highly skewed with the latter being significantly higher than the former. With per capita cement consumption at less than 200 kg when the world boasts of an average of 500 kg, can the Indian cement industry be the driver of growth for India? We need to understand certain dynamics to answer this question.
The Indian cement industry consists mostly of regional players, rather than national ones. The reason for that, is cement being a bulk commodity and therefore freight-intensive, transporting it over long distances proves uneconomical. And hence, this industry has largely been a regional play. Lately, there's been a lot of consolidation - big players have been vigorously pushing to acquire smaller regional players. This trend is likely to continue, and we may be witnessing even more acquisitions in the near future.
The industry defines three categories of cement companies. The differentiating factors between one category and the other are primarily quality and price. Let us delve a bit deeper into these factors and understand how the industry operates, playing with either or both of these factors.
At the time of construction, the difference between a good and a not-so-good cement is not visible to the end consumer. And that is the reason why many low-priced cement companies are flourishing in the market today. The consumer has little or no idea about how the cement used in their construction will behave after some years. Hence he does not put much emphasis on ascertaining the quality and instead, goes after a lower price.
There are companies which focus on the quality of their cement, to the extent that they have automated systems for regular quality tests. These systems ensure that not just a sample of cement is tested but the entire production is tested on a regular basis. Understandably the cement produced is of superior quality and provides greater value for the price paid.
Building one's own house is a dream fulfilment for most people and the individual house builders (IHBs) need to realise that construction of their house is a one-time investment. Saving some amount in cement, which would be quite negligible when calculated and compared to the total investment being made on the construction, can prove to be an uninformed decision in the long run.
New shifts in consumer connect
Traditionally, cement companies have highlighted only functional benefits in their consumer connect programs or advertisements, with the objective of educating the end consumer. However, the consumer today is not only well-equipped to research what they don't know, they are also flooded with advertisements and information from multiple sources. In such an "information overload" world, functional benefits are not able to attract the consumer's attention the way they used to earlier. Rather, in today's times, it is the emotional connect that has the potential to tap into the consumer's attention span and subsequently his purchase decision. This has been recognized by most companies of the industry, which is why cement advertising has more emotional content and connect these days.
Scenario in 2020
The demand for cement showed a downward trend during the first half of the FY 2019, owing largely to lower spending by the government, which accounted for about 40 per cent of the demand. Along with that, the real estate sector had also been less supportive, being hit by several factors simultaneously - labour shortage, a liquidity crunch, weak project execution, shortage of funds, and less availability of sand and water in many states. Natural phenomena like cyclone Fani (in case of Bihar, Odisha and WB) and excessive rainfall also impacted demand.
The silver lining is that demand growth in the second half is expected to improve because of a gradual pick up in the government's fund release for institutional projects. The industry would be witnessing higher revenues and profits due to lower raw material costs, falling global commodity prices and reduced power and fuel costs (owing to softening in pet coke and coal prices) as well.
The demand drivers of cement in India are primarily the housing and real estate sector (65 per cent), public infrastructure (20 per cent) and industrial development (15 per cent). The current demand is expected to increase owing to expanding investments of these drivers.
Higher government spending on infrastructure and housing will be a key growth driver for the industry. The Government of India has placed significant emphasis on infrastructure development with the aim of making 100 smart cities, expanding the capacity of our railways, upgrading 1,25,000 kms of road length over the next five years and increasing the facilities for storage and handling of goods in order to reduce transportation costs.
The drive to take India's economy to US$ 5 trillion by 2025, with initiatives such as Housing for All and Smart Cities Mission will be heavily reliant on the growth of the cement industry. Other Government initiatives that are expected to play a pivotal role in driving the growth of the industry are the construction of cement concrete roads and highways through the unique Bharatmala Project, construction of rural roads under the Pradhan Mantri Gram Sadak Yojana, metro rail networks in several cities, bullet train, etc. which will all propel the cement industry's growth in the long-term.
Also as India's population becomes increasingly urbanised and household sizes steadily fall, a growth rate of close to 6 per cent per annum is expected from the housing sector's demand for cement.
Road ahead - 2030
The Industry believes that there would be a surge in demand due to the requirements of the strong infrastructure framework that the nation endeavours to put in place through its Government as well as Housing Projects. The demand for the housing segment is expected to grow at 6 per cent per annum' through the PPP model (Public Private Partnership). As a result the per capita cement consumption in the country is expected to rise from 225 kg in 2018 to 435 kg by 2030. This will enable us to meet the future cement demand of the nation by 2030 at an additional capacity expansion of 365 MMT; which is an increase of almost 82 per cent of the current demand. So while it has been a bumpy ride for the cement industry in the last couple of years however the future looks very optimistic and promising.
ABOUT THE AUTHOR: The article is authored by Sanjay Joshi, Executive Director, Wonder Cement