India is the second largest producer of cement globally and the industry has been a vital part of its 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 sector is expected to largely benefit from the country's huge potential for development in the infrastructure and construction sectors. Some of the recent major initiatives like development of 98 Smart Cities will provide a major boost to cement demand.
The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 75 per cent of the total cement production of the country. A total of 188 large cement plants together account for 97 per cent of the total installed capacity in the country, with 365 small plants accounting for the rest. Of these large cement plants, 77 are located in Andhra Pradesh, Rajasthan and Tamil Nadu.
On the back of growing demand, due to increased construction and infrastructural activi-ties, the cement industry has attracted huge inve-stments and developments in recent years.
India's construction business stands over at Rs 30,000 billion, and has been slowly expanding over the years. With value addition of over Rs 10,500 billion, its share in total GDP rose from 5.6 per cent in 1990-91 to over 7.7 per cent in 2016-17. This has given a major advantage to the cement industry, which is poised to expand with increased attention of the government promoting large infrastructure projects.
However, the growth of construction activity has slowed down significantly in recent years. 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 3.1 per cent, slightly faster than the 2.8 per cent clocked in 2015-16. Going ahead, it appears that the growth will remain under 5 per cent, thus truncating demand for construction materials, including cement.
However, the growth will largely depend on the government's initiative in developing infrastructure and the process of boosting the housing sector.
In construction, cement is the second-largest component, although its value accounts for only 12 per cent of total input cost of construction, whereas steel takes away nearly half the cost of inputs. Over Rs 2,000 billion worth of cement is consumed to construct a variety of structures. Within this premise, dwelling construction account for 30 per cent of all construction activity, while another 40 per cent is accounted for by non-residential buildings construction.
Roads and bridges, major infrastructure components, account for just 6 per cent of constru-ction. What remains is other structures and land improvement activity. Thus, housing and commer-cial construction is the major economic activity and it is largely dependent on cement and steel.
Cement production volume in 2016-17 has seen a year-on-year decline for the first time in 15 years, as the demonetisation exercise reduced demand. The industry, with an estimated capacity of around 420 million tonnes, saw production fall 0.7 per cent during the year. However, with no authentic data available on cement consumption or demand in the public domain, estimating actual production figures is a difficult exercise.
Cement demand has a close linkage with eco-nomic growth and government spends. Demand for housing is driven by income growth while infrastructure development largely depends on government expenditure, both state and Central.
In the recent past, demand for cement has remained poor as economic growth slowed down to less than 6 per cent between 2012-13 and 2016-17 from an average of 9 per cent between 2005-06 and 2010-11. During that period, cement demand had expanded by 8.5 per cent per annum, which has come down to around 4 per vcent per annum over the past five years.
Considering that the economy may grow at 8.50-9 per cent over the next five years, the statistical relation between cement demand and economic growth predicts that demand for the commodity may grow at the rate of 4 per cent per annum over the next five years.
The housing sector will be biggest demand driver for cement, which now accounts for about 45 per cent of total cement consumption. The other major consumers will include infrastructure (17 per cent), commercial construction (11 per cent) and the rest will be made up by industrial construction. Rural housing (40 per cent) and urban housing (25 per cent) will be the major demand drivers for the cement industry.
The industry is bullish over demand on account of the government's focus on infrastructure and housing. The Union Budget for 2017-18 has raised the allocation for roads from Rs 5,798 billion in 2016-17 to Rs 6,490 billion in 2017-18, with a stress on laying 2,000 km of coastal roads.
According to estimates, cement comprises 30 per cent of the cost of laying a road and the budgetary allocation may translate into a Rs 1,947-billion business opportunity for the industry. For the transportation sector alone, Rs24,139 billion has been allotted for 2017-18.
Although demand for cement will not be significant, increase in volumes and prices will be pertinent for a cement industry as volume will satisfy increasing demand and prices will rise to help manage rising costs.
To boost cement demand, the government has been approving various investment schemes (see Box-1) as fast as possible.
A Macro View
ACC believes that the prospects for economic growth have become buoyant with the rural economy benefiting from a good monsoon after two successive rain-deficient years. However, the Goods and Services Tax and the demonetisation scheme which aimed to usher in greater tran-sparency in financial transactions and a transition towards a cashless economy, over the short term, has squeezed liquidity and consumption across the economy, notably in the construction sector.
The outlook for 2017 is bright, as liquidity in the economy has moved towards normalisation, with expectations for early revival and growth in overall consumption across several sectors including construction and building materials. The Union Budget with thrust on the rural sector, infrastructure development and housing will boost the overall investment climate. If 2017-18 experiences a normal monsoon, GDP growth is likely to rebound during the year. Better liquidity and improved tax collections will enhance the government's ability to spend on infrastructure and other development projects, leading to faster growth.
ACC foresees that the industry will continue to be dogged by the challenge of excess capacity leading to intense competition. If the government is successful in increasing its investment expen-diture on large infrastructure and other develo-pment projects as announced in the Budget, it will further energise construction activity. Any cut in interest rates on housing loans will boost investment in the housing sector. Together, these developments will provide the much-needed fillip to demand for cement and concrete in the coming year.
According to Gujarat Ambuja Cement, despite several challenges, the economy has immense potential, which will power economic growth. The securitisation of real estate - Real Estate Inve-stment Trusts and Infrastructure Investment Trusts - is likely to foster greater economic activity, along with a more efficient and transparent market.
For demand growth, the government has provided incentives for rural development and also allowed 100 per cent FDI in the construction of development and industrial parks. Overall, cement demand growth is expected to rise in 2017-18 on account of higher government spending on various initiatives as announced in the Budget along with incentives for affordable housing by providing it with 'Infrastructure Status'. This will boost demand for cement by a positive multiplier.
Housing demand is not expected to see a significant turnaround in the short term. However, much would depend on higher-than-expected demand or significant progress by the government on schemes such as 'Housing for All' or Smart Cities. If they are well implemented, it could result in good demand for cement in the near future. A below-than expected pick up in construction and infrastructure projects could affect demand for cement and the credit profile of cement companies. This may play a negative role for cement demand.
The cement industry has now become intensely competitive, with the foray of new entrants and existing players expanding inorganically. This could potentially impact market share and margins.
With the new Mines and Minerals (Development & Regulation) Amendment Act 2015, the earlier policy of deemed renewal has been discontinued and all the mining leases will be allotted through an auction. This has made it difficult for cement companies to retain or acquire existing leases. Forest and wildlife clearances are now a prerequisite and land acquisition is becoming more challenging and expensive.
Here are a few initiatives taken by the government in the recent past to boost cement demand:
- Assigning 'infrastructure status' to affor-dable housing projects and facilitating higher investments and better credit facilities, with an aim to provide 'Housing for All' by 2022. The cement industry stands to gain from the grant of infra-structure status to affordable housing;
- Interest rate rebate of 3 per cent for Rs 12 lakh housing loans will boost demand for real estate in Tier-II and Tier-III cities;
- The Finance Minister has announced that the National Housing Bank will refinance individual housing loans of around Rs 2,000 billion ($3 billion) in 2017-18. The minister has also set a target of completing 10 million houses by 2019;
- Increased allocation to rural low-cost housing under the Pradhan Mantri Awaas Yojana- Gramin scheme to Rs 2,300 billion ($3.45 billion) from Rs 1,600 billion ($2.4 billion) in FY17. This will directly drive a 2 per cent increase in cement demand;
- With the Parliament clearing the amendments to the Mines and Minerals Development and Regulation (MMDR) Act, it has enabled companies to transfer captive mine leases, similar to mines won through auctions. This will lead to more mergers and acquisitions among cement companies;
- The government's plans to revive state-run cement factories across India will give a boost to road and realty projects by bringing down construction costs;
- A 15 per cent increase in capital outlay on infrastructure projects will create cement demand in roads, railway projects, irrigation and port projects;
- Higher allocation to MNEGRA will boost rural income and have a catalytic effect on rural consumption. This is expected to help the cement industry, as it will lead to increased and sustained levels of cement consumption.