Logistics harbinger of next disruptive change
The last decade has by and large been very good for Indian cement industry. The industry has grown at a CAGR of 8.4 per cent and has made record capacity addition of 130 million tonnes over the last ten years. However, the recent hiccups in Indian economy have rattled the industry. As growth slows down the gap between demand and supply has widened. Add to this the dilemma that while costs are spiraling upwards the prices are struggling to rise. No wonder the industry´s margins are under huge pressure and Indian cement industry faces its toughest challenge so far. So what does the future hold for the industry? Let´s start with the good news first. Many believe things are improving. The economy is likely to turn around in the next 2-3 quarters. Investment cycle is picking up. The growth in economy will lead to concurrent growth in cement demand and the latter is expected to bounce back and reach a level of 7-8 per cent this year. This will help bridge some gap between demand and supply.
Now what´s the bad news? The bad news is that though the economy seems to have bottomed out inflation remains stubbornly high. This means that costs will continue to rise and if prices do not gallop faster than costs the industry´s margins will remain subdued despite increase in sales volumes. So where does this leave us? The message for the industry is clear. Hope for the best and prepare for the worst. The Cement Industry in India has no choice but to keep a very watchful eye on its costs. Its cost structure has got badly bruised in last 3-4 years and the same needs to be repaired. Let us dwell deeper.
Indian cement industry has three major cost buckets - Taxes, Manufacturing costs (including fuel and power costs) and Logistics & Distribution costs. Let us examine each of them closely. The first bucket is beyond industry´s control. It can represent, coax and pray to the government but the latter may not oblige, as it had not in the past. The second bucket of manufacturing costs has been industry´s favourite whipping boy. The industry has made a steady progress in keeping a tab on manufacturing costs. Indian cement industry today is comparable to the best in the world in respect of quality standards, fuel and power consumption, environmental norms, use of latest technology and capacity. However the productivity parameters are now nearing the theoretical bests and further improvements will only have a marginal impact and be governed by law of diminishing returns. As such there is little scope in any major savings in manufacturing costs
Finally let´s fix our gaze on the third and the last bucket - Logistics & Distribution costs. It would not be an exaggeration to state that industry has been unduly kind and generous towards this bucket. The logistics & distribution practice in cement industry has been relatively stable and nothing much has changed in the manner in which we handle and transport cement to our customers. This despite the fact that logistics, both inbound and outbound, constitutes nearly 30 per cent of the total unit delivered cost of cement and that the sector is craving for innovation. So can logistics be the harbinger of next disruptive change in the industry. To answer this question we need to examine things closely.
In my opinion apart from the overwhelming cost compulsions there is strong convergence of internal and external factors, which will drive innovation in logistics & distribution practice and foster new thinking in this area.
The Indian Cement Industry has long benefited from a fairly uniform availability of limestone deposits throughout the country. Barring eastern India, availability of limestone in most parts of India has ensured that cement does not have to travel huge distances for consumption. However, this is likely to change in near future. The low hanging fruit in respect of limestone deposits has already been grabbed. Fresh, good quality, environmentally sustainable limestone deposits are now abundantly available only in far-flung areas of Kutch in Gujarat and Jaisalmer in Rajasthan. Sooner or later these deposits will have to be harnessed to satisfy nation´s growing appetite for cement. Capacity additions in future will therefore require large investments in logistics infrastructure to enable economic transportation of cement to consumption centres in northern, central and western India.
Likewise, the fly ash footprint of India is rapidly changing. Pit head and coastal based thermal plants are fast replacing old and relatively inefficient thermal power plants set up close to consumption centres owing to heavy costs of moving coal. Huge investments planned in power transmission infrastructure in next 4-5 years are only going to accentuate this change. About 45 per cent of the total cement sold in India today is fly ash based. The industry will have to find ways and means of transporting fly ash in big volumes over large distances economically to stay competitive.
After being in slumber for years the Indian Road Transportation sector is undergoing massive transformation. There is a renewed thrust on building new highways and widening of existing ones. This along with general improvement in pavement quality and planned electronic tolling system would help truckers increase their average speed from a dismal 30-40 km per hour at present to 50-60 km per hour in future.
Additionally, entry of MNCs like Volvo, Daimler, Navistar, etc., will facilitate progressive introduction of heavier, large size, multi-axle trucks, powered by efficient engines that burn less diesel for every ton km of cargo movement. All these developments will have a major impact on the cost dynamics of road transportation in India going forward.
Next let us look at the railways. Herein, I believe, is the biggest opportunity. Railway perhaps, is the only segment is the Indian transportation sector, which is yet to reap the benefits of liberalised industrial policy of GoI. With opening of this sector to FDI and huge investments envisaged in construction of dedicated freight corridors, private freight terminals, up-gradation of signalling and civil infrastructure of existing network and investment in rolling stock, the freight carrying capacity of railways is likely to increase manifold going forward. Add to this, the broad thrust of Indian railways towards longer, faster, bigger and heavier trains, this sector will offer plethora of opportunities for the industry to join hands with railways and invest in specialised wagons and state-of-the-art handling infrastructure for bulk transportation of clinker, fly ash and cement. Rail siding warehouses is another exciting opportunity and could be game changer for both Indian cement industry and railways. The industry in collaboration with railways can set up warehouses for cement storage alongside railway sidings thus saving on huge costs incurred in handling and transporting cement bags to warehouses located outside the yards. Railways in turn can gainfully utilise its land assets and make them productive. Inland waterways provide yet another opportunity for moving bulk cargo from central and northern India to eastern India and vice-versa. With the renewed focus on cleaning and refurbishing of the river, the Ganga National Waterway 1, spanning from Allahabad in central India to Haldia in West Bengal, can provide a viable and economical means of transportation for bagged/bulk cement, coal and clinker.
However, the benign environment will lead to nothing if the industry does not shed its inhibitions and proactively embraces the change. So what does the industry need to do to benefit from this historic opportunity? Broadly two things - first logistics & distribution function will have to play a proactive role in business planning and core strategy. Traditionally, logistics practice has always been reactive in its approach. Instead of finding a best fit solution for a given business plan it should be driving it particularly in areas of new project development and capacity addition plans. Ideally the function should span across design, engineering, raw material sourcing and culminate at finished goods movement Secondly, the industry needs to segregate distribution function from sales. This will have twin benefits. One it will bring transparency in channel discounts/margins and save distribution from being a source for income for the sales channel.
It will help bring specialised agencies in cement handling and distribution and throw open the door to increased mechanisation in this sector, which is presently labour intensive. Herein it will be interesting to note that channel network in cement industry, which earlier shouldered a dual responsibility of stock keeping and selling, has gradually transformed into a pure selling role. This has increased the need for warehousing and secondary transportation. Since the storage and distribution costs are anyway now being borne by cement companies this is the right time to separate this role form sales network. A dedicated and focussed distribution network functioning in parallel and collaboratively with sales network will help reduce multiple handling a cement bag undergoes before it reaches the end user. It will also prepare the industry for yet another historic opportunity, which is knocking on its doors - E sales - selling cement direct to consumers.