The bigger concern in the coming years would be the cost implication
Recently the cement industry has gone through a lot of volatility. The reduction in the cost of cement and the increased costs of freight has made headlines. Vinita Singhania, Managing Director, JK Laksmi Cement talks to ICR about her views on the cement industry.
What is your view on the current scenario of the cement industry?
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.
In my view, cement manufacturers are presently struggling to pass on the steep rise in freight and raw materials cost due to slow down in demand. The industry is already facing a challenge of excess cement production capacity in the system.
Notwithstanding the excess capacity already built-up, the cement industry is expected to add another about 30 million tonne of capacity in 2013. The industry has a capacity of 324 million tonne per annum and operates at 75-80 per cent utilisation, due to weak cement demand. These utilisation are unlikely to improve in near to medium term.
Recent increase in diesel prices by Rs. 10/liter in the institutional category has further added problems for the cement players as transporting cement, clinker and raw material by road would turn costlier. The impact of diesel price hike will be multi-pronged and may vary for companies depending on their dependence on this industrial fuel.
The prospects of cement companies much l depends on the revival in demand. The southern and central region would be bearing the brunt of the capacity addition. However, the slew of economic reforms announced by the Government and expectation of RBI lowering interest rates should boost sentiments and perhaps once a-gain kick start the sagging economy. The industry expects cement demand to revive to some extent in the Jan-March quarter, as Govt. departments, as also infrastructure companies would be in a hurry to complete their projects before the financial year ends.
The year 2012, has been volatile for the cement industry and most of them predict a marginal growth for the year 2013, what are your views on the same. Also highlight the strategies to combat the same.
The volatility in the cement industry is not new and the industry has got used to the cyclical pattern in the cement consumption. In fact, the capacity creation itself is cyclical resulting in capacities coming in bunches and hence, the volatility. However, in the first nine months of the current financial year FY13, the demand has been below the expectation as the industry based on assumptions of 10-12 per cent per annum growth (as witnessed by countries like China continuously over decades when they were in the process of adding a large scale infrastructure to boost their economy). Unfortunately, the demand has been much low registering a growth of 7 per cent FY12 and about 6 per cent in the first 9 months of the current FY13. The demand forecast can be related to the growth in our GDP and therefore, if the outlook towards the GDP improves, the cement consumption is likely to see a better growth correspondingly.
The bigger concern in the coming years would be the cost implication of the increase in the price of Diesel and the declining availability of coal.
JK Lakshmi Cement has been pursuing aggressive marketing activities in the rural markets and therefore, has been able to obtain much better capacity utilisation than its peers in the industry. We operated at about 98 per cent capacity utilisation in FY12 and even after additional capacity creation during the current FY13; our capacity utilisation is not likely to be lower than about 94 - 95 per cent. On the cost front, we have been continuously improving upon our operating efficiency. With the power consumption of 75 kwh/mt and fuel consumption of 738 klcal, we would be one of the most efficient cement plants in the country. We have succeeded to a large extent in insulating ourselves from the vagrancies of the coal availability by switching over to pet coke much ahead of time, when the coal availability of was still good. This has ensured not only an uninterrupted supply but also considerable saving in the cost. We have been working with optimum mix of rail/road transportation to optimise our freight cost and to minimise the impact of hike in diesel prices.
As reportedly stated in the year 2012, only 70 per cent of the clinker facilities have been utilised, 30 per cent has gone unused. Despite a drop in the demand for cement, you seem to have increased your cement production. Kindly highlight the strategy or reasons for the same.
According to a 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. And as a matter of fact, JK Lakshmi Cement is a leading regional player and our maximum profit is driven from north region. The industry expect 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. And as the cement prices would also increase, that would help cement companies to maintain the profit margins.
What support do you require from the government on the policy level?
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.
Some of the other issues which need government's immediate attention are -
• Duty rates on Cement are one of the highest and are treated like a luxury good. Other core industries such as coal and steel attract much less duty. Cement is one of the core infrastructure industries which is essential for development of nation's infrastructure. Somehow, this aspect has continuously been ignored.
• To encourage cement industry and bring it at par with other core and infrastructure industries, the excise duty rate should be rationalised from 12 to 6-8 per cent. In addition, the duty structure should be simplified to be either on specific rate per mt or on ad-valorem basis and without relating to MRP etc.
• It is requested to provide a level playing field; 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.
• Energy cost is a very substantial part of producing cement, both in India and Globally. The price of conventional energy resources are rising and are adversely affecting the environment. The State Governments are imposing renewable energy obligations on the industry. 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 endeavor to produce more such environment-friendly energy, it is requested that such energy generation be treated as Renewable Energy Source.
• Cement industry is one of the basic and core infrastructure industries. However, unlike other similar industries/goods, cement is subjected to higher rates of taxation. It is proposed 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 sector goods like coal, steel, crude oil, jute, cotton yarn etc.
• Central Government has made proposal to State Government for dual rate under GST which would be brought to single rate over a period of three years. However, it is suggested that single rate may kindly be introduced from the first year itself, so that all disputes/litigation towards classification can be avoided from first year itself.
• The Central Govt. has been putting lot of emphasis on the use of Solar Power and as per the "National Solar Mission" there is plans to generate 20000 mw of Solar Power by the year 2020. With a view to achieving the above target, the Central Govt. in the Budget for 2010-11 had exempted all the plant, machinery, equipment etc. required for setting up of a Solar Power Plant, from levy of Excise Duty and Basic Custom Duty on these items was brought down to 5 per cent. In view of the fact that the Initial Cost for setting up Solar Power Plants is relatively higher when compared to other sources of energy, it is requested that the import of plant, machinery, equipment etc. for this purpose be fully exempted from levy of Custom Duty
• Moreover, the industry also been requesting the government to increase the rail wagons and to assure the availability of coal, but nothing has actually materialized and it is a major concern for the industry
• The reduction in custom duties on key inputs such as pet-coke and gypsum had indeed brought relief to the industry. But the hike in rail freight rates and basic custom duty has resulted in increased rate of commodity. This has made a cascading effect on overall construction sector and has also adversely affected the infrastructure growth.
What are your future plans?
I am quite optimistic as regards the medium and long term prospects of the Indian Economy, as I firmly believe that Indian Economy has to grow and would have to invest huge amount in infrastructure built up. For that to happen, there is no alternative but to ensure a decent growth of domestic cement industry. It is with this optimism that we continuously invest in further capacity creations. Therefore, in the short term of about two years, we aim to double our capacity to over 10 million tonne from the existing capacity of about 5.3 million tonne. Further, our existing as well as expansion capacities are based in Northern and Eastern Region of the country, which are comparatively better placed in terms of demand-supply equation. Backed with these capacities, a good brand-equity and a team of motivated work-force, I am quite confident of making a reasonable position in the Indian Cement Industry.