Where is the uptick?

Where is the uptick?

The core sector such as mining, power, steel and cement accounts 38 per cent of overall industrial production which is about 27 per cent of the GDP and lack of expansion of these core sectors automatically dents the growth of the entire economy. As the domestic product growth has faltered over the last couple of years overcoming structural constraints has become all the more important to provide a much-needed boost to the economy. The core sector data for September 2013 has shown a spike in production (coal 12.5 per cent; cement 11.5 per cent; and electricity 12.6 per cent), and this sudden spurt in core infrastructure sector growth has, to an extent, brought positive vibes in general. But experts opines that the same trend cannot be taken as recovery trend, and revival of growth is still far away which requires clear cut policy initiative from the government; and that is expected only after the General Election.

The cement industry has been growing well in the last decade. Unfortunately, the cost of manufacture and transport too, is on the rise. Compared to other industries, cement has the highest logistics cost as percentage of sales. The cost of freight has been rising due to the increase in oil prices and last mile delivery too, is a challenge in the whole Supply Chain Management (SCM). Fierce competition amongst cement companies to grab a bigger share of the market pie has resulted in innovative SCM, which has its pros and cons. Most of the major players have over the years built up extensive network of dealers, distributors and to manage the last mile connectivity across their markets which helps to achieve higher capacity utilisation.

A sluggish economy, shrinking profit margins and fluctuating prices have brought a plethora of challenges to the cement dealers and distributors who had so far been a vital link. The network dynamics are now changing. Most big companies are integrating more dealers and fewer distributors into their network. Unlike in the past some of the major players have started the DCS (Direct Consumer Service) initiative where the consumers and manufacturers are connected directly, which in effect is side stepping the dealers. Cement companies are promoting several sub-dealer shops in small areas which have intensified the completion, and to make matters worse, companies are also selling cement through non -trade sales where the price gap between cement sold via trade sales and non-trade sales is very high. This too, seems to have tilted the equilibrium especially when cement companies have started taking orders irrespective of the order size. As per reports, the trade market is fast vanishing - in cities like Mumbai, only five per cent deals take place at trade rates, the rest is at non- trade rates. Pune too, is now on the same track. This has put enormous pressure on the dealer community. In a sluggish economy the focus is on cost control and therefore dealers will get squeezed.

We seem to be a at the bottom of the curve and the election process will see infusion of a total spending of estimated $6 billion which will cause some multiplier effect in the economy. The IT industry is showing better growth and will cause a boost for realty sector which in turn will swell the demand from the housing sector. So while we may move sideways for a while the uptick is not far away.

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Indian Cement Review
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