Indian Cement Industry is boiling with energy. New cement plants are sprouting up like one room retail shops. All the major groups are announcing homogonous expansion plans. Cement prices are steady for the last one year and seems strong enough for at least 2 more years. Companies have declared tremendous growth in profit for the last fiscal year. How long this growth will remain robust? An analysis of the prospect of Indian Cement Industry will rightly call up on a look on what happened in China few years back, the largest cement industry of the world.
The Chineese Story
Two years back the cement consumption in China was 1.19 billion tonnes while the cement production stood at 1.24 billion tonnes. It maintained 1st place for production and consumption for the 22nd consecutive year. The per capita production of cement was 450kg. In the same year India produced 161 million tonnes of cement. The per capita production of cement was 115kg. Average CAGR was 8% against world average of 3.5% and China’s 7.2%. But this doesn’t provide an appropriate ground for comparison. For that we have to go back to the 90s.
In 1990 the cement production in China was around the present production in India-200million tonnes. Around 6000 cement plants were there, both legal and illegal. Most of the plants were small with annual production under 0.1 million tonnes. The widely used technology was the inefficient and obsolete Vertical Shaft Technology. Most of the plants were located in coastal areas irrespective of whether a mine present nearby or not. The Chinese Government showed first sign of realization of necessity for consolidation and up gradation.
The investments made in the sector were non-strategic local investments, majority of them on outdated technology. Laws for foreign investment were not well defined or uniform. Still investors preferred China for their investments because of the lower risk and better business environment for manufacturers. ADB and World Bank were providing debt financing on a large scale.
Most of the traditional cement plants were located near demand centers and not near source of raw materials. The inefficient technologies used resulted in high coal consumption. Scarcity of water another problem faced by these industries. All these factors resulted in production of low quality cement to achieve profits.
The Chinese cement market in the late 90s consumed 35% of world’s total cement production. Due to over capacity in the country the cement prices were low. Cement was used extensively in road construction. There existed no adequate National Highways. The rail system was overburdened. Most of the plants were located in or near cities, this further increased plight of poor transport facilities. Water traffic was evolving as an feasible alternative. Environmental problems were another cause of worry.
Experts predicted an annual growth of 3.4% and the production thus reaching 660million tonnes by 2005, 750 by 2010 and only 800 million tonnes by 2015. They expected production level to hold close to 2000 levels while anticipated a fair amount of up gradation of technology and efficiency. But all forecasters were proven wrong.
The year 2003 was a turnaround year for Chinese Cement Industry when it witnessed a dramatic growth. Good economic operation, rapid growth of output and steady increase of sales became industry’s identity. Rapid improvement of performance and acceleration of structure adjustment changed the entire outlook of the industry.
Total cement output reached 862.71 million tonnes, up by 18.9% over the previous year. Cement plants having output of 0.2 million tonnes or more took up 59.995 of total production volume. Ratio of sales to production was more than 99% after a long time in 2003. Profit was 148.20% higher than that of previous year. Increase in domestic demand resulted in export becoming 2.63% lower than that of previous year. New dry process cement clinker capacity reached 63.72 million tonnes.
The factors which contributed to such a gallop in production and sales were recovery of real estate industry, rapid growth of national economy, China hosting 2008 Olympics, Government strategy of developing western regions, 2010 Shangai World Expo, and the urbanization drive which became zeitgeist. Government policies of consolidating and upgrading cement facilities and forced closing down of small, outdated and illegal facilities facilitated the industry to cope up with the sudden increase in demand.
Present Indian Scenario
In India there are 129 large cement plants with an installed capacity of 165.10 million tonnes. In addition to these there are 206 operating mini cement plants with an estimated capacity of 11.10 million tonnes per annum. 94% of the total capacity is controlled by big groups.
Managerial Incompetence and interest burden of debts are among the main hurdles faced by most of cement plants. Our commerce ministry, at least according to the officials of the ministry, is earnestly trying to provide inexpensive global funds. But all the big daddies of cement don’t face any difficulty in funds. Access to domestic and international market is an added advantage to all of them.
Movement of cement in India is mainly via road, since the existing rail infrastructure is inadequate. Railway ministry has announced ambitious plans to allow private players to buy wagons, to thrust on bulk cement transport. Of the 162 kilns in operation 128 uses dry process, 26 run on wet process and 8 on semi-dry process. The average annual installed capacity per plant in India is about 1.2mtpa. Average consumption of energy in 2005-06 was 725 kcal/kg clinker thermal energy and 82 kWh/t cement electrical energy.
The total reserves of cement grade limestone 97430 million tonnes of which 23% is in the proven category, 20% in probable and 57% in the possible category. Though the quality of limestone meet the global standards environmental and technological constraints leads to low availability of even proven reserves of limestone. India is having abundant reserves of coal but the coal mining industry is witnessing only limited capacity additions.
The key drivers of cement demand in the country are requirements from the housing sector, infrastructure and corporate capital expenditure. Expansions coming up in ports, concrete roads, airports and railways also paint a sanguine picture of the industry’s future. Many new capacity additions happening in the Middle East are likely to act as dampeners to the growth of export.
Several measures proposed by the government also points to a bright future for the industry. Housing Development Programs, Promotion of concrete highways, Use of ready-mix concrete in large infrastructure projects, and Construction of concrete roads in rural areas under Prime Minister’s Gram Sadak Yojana are a few among the measures which will directly increase cement consumption in the country. The proposed coal regulator to facilitate timely and proper allocation of coal is another step in this direction. The Eleventh Five Year Plan projects a capacity a addition more than 100mtpa increasing total capacity to 298mtpa by 2012.
The government’s confidence in an assured growth is further highlighted by the railway ministry which has already announced plans to double the cement transport. The ‘Laloo’ Ministry expects the freight level to reach 200 million tonnes by 2011-12 from the present 100 million tonnes. Doubling of rail between Daund and Gulbarga and the electrification of Pune-Guntakal line are measures which will rake in much more revenue from cement freight to the railway’s account.
In comparison to the Chinese Cement Industry of late 90s which witnessed explosive growth Indian Cement Industry is better poised in many aspects. Better infrastructure, wider use of modern technology, bigger average plant size, better availability of finance, booming economy, demographic revolution and the suitable location of plants are factors which should enable the industry to register an exponential growth if not more.
The proposed $150 billion investment in infrastructure, Public-Private Partnership in Railway allowing cement manufactures to own wagons, Dedicated Railway Freight Corridor, National Maritime Development Project, Single Window Clearance and Fixed Time Approval of projects and the increased savings level of middle-class leading to increased domestic capital are all factors which better the prospects of the industry.
But everything is not so positive. The government policy which was an important factor in China’s growth is inadequate if not worse. Slow growth infrastructure particularly transport has adverse effects, cement being a bulk commodity. Restriction on foreign investments and power outages which results in a loss of production that is 8 times of that in China doesn’t make the situation any better.
The champions of labor class while fighting for more benefits many times forget the fact that such anti-industry policies will not only affect the owners but also the workers. Employers are reluctant to add extra workers in peak seasons due to the complex rules. Labor Market Reform is an immediate step to be taken to resurrect many ailing industries. India ranks poorly in the environment for doing business compared to some of our neighbors. There exist no full fledged regulators for road, railways or ports. CAGR of investment in infrastructure is as low as 6% for the last four years. Poor disbursement of allocated funds is a malady disturbing India from the Independence Days.
Conclusion
In contrast with the Chinese Cement Industry of late 90s present Indian Cement Industry operates on modern technology (outdated technology of cement processes is still a malefactor in China). The location and size of plants as well as better availability of finance make it better. Quality meeting global standards and demographic revolution are euphonious to the industry. But inadequate labor reforms and delay in implementation of government projects are problems which were non-existent or which existed in a lesser degree in China. The sudden slowdown of the global economy is also a threat to the peaceful progression.
Even then prospects are sanguine considering the growth China achieved in spite of several odds. Till end of 2009 many Greenfield and brown field projects are inline. A recession can happen around 2010 for one or two years. But it will not be a permanent phenomenon.
