future-of-indian-cement-industry

Given the sustained growth in the housing sector, the Government’s emphasis on infrastructure (both at the national and the state level) and increased global demand, the outlook for India‘s cement industry is exceedingly bright. The demand growth for the current fiscal is expected to be in the region of 10 per cent, which will translate into a demand of 175 mt. To meet this rising demand, many Indian companies are going for capacity expansion. Close to 54 mt of additional capacity is to come up in the next three years, with an investment of around US$ 5.31 billion.

According to a Deutche Bank report, close to 5.1 mt will be added by second half of 2007-08, while 11.46 mt will be added in 2008-09. Around 28.90 mt is likely to be added in 2009-10 and 2.87 mt in 2010-11. A similar projection by National Council of Applied Economic Research (NCAER) for cement consumption, on a conservative basis, has placed cement demand at 225 mt by the fiscal year 2011. If the Government goes ahead with infrastructure projects as planned, consumption is likely to be much higher at 291 mt.

In the overseas market, there are many enquiries for cement with reasonable prices. About 36 states in the US are facing shortage of cement and their construction activity has slowed down. To overcome the problem, the US has relaxed the import duty on cement recently.

The cement sector is expected to witness strong production and consumption growth of 10% during FY2007 in line with the economic growth because of the strong co-relation with GDP and the increased activity in the construction sector. Future drivers of cement demand growth in India would be increased spending on road and housing projects.

The housing sector, which accounts for around 55-60% of total demand, is also likely to continue to be one of the driving force behind cement demand. It is estimated that requirement of new dwelling units over a period of 25 years (1996-97 to 2020-21) will be around 140 million units requiring an investment of approximately Rs. 20,000 billion.

Besides, demand from infrastructure projects and industrial/commercial ventures account for 20% each. Even as NHDP-I (comprising the Golden Quadrilateral or GQ and North-East-South-West or NESW) near completion (GQ by end-2006, and NESW by 2009), demand in the port and airport segments may pick up, keeping demand buoyant. Further, NDHP-III to NHDP-VII (2006-15) envisages construction of another 36,000 kms of roads at an estimated cost of Rs. 1,270 billion.

Overall, from the demand perspective, the fundamentals look bright, and cement demand in the medium term is expected to grow by around 9%. Growth of 9% per annum from FY2006-10 would result in cement production increasing to around 196 mt in FY2010. By comparison, consumption could increase to 190 mt in FY2010. China, the world’s largest producer of cement, has seen sustained cement production average annual growth of 10% since 1980, mostly due to the enormous infrastructure development that country has experienced over this period.

2.     Cement Consumption Growing at a Robust Pace

In the coming years, in India the Cement demand growth is expected to move up to a range of 9-10% from a historical 8.4% p.a. The South-West region is expected to lead with 9.5-10% whereas the North and East are expected to

grow at 8.5-9% p.a.

Per capita consumption of cement is expected to grow from 131 kg in 2006 to 193 kg in 2011 in the country.  The total consumption of cement in the country is expected to increase by 9-10% per annum to reach ~230 mtpa by 2011.

3.     Infrastructure and commercial sectors will drive change in demand

Currently the market demand is mainly driven by housing sector. But in the coming years infrastructure and commercial sectors are expected to drive the change in demand while the share of housing sector is expected to decrease.

This conclusion is on the on the basis of expectation of increased spending on road and housing projects. The Union Budget for FY2007 has provided further thrust to the infrastructure sector through several initiatives, such as:

q       Budget support on the National Highways Development Programme (NHDP) increased from Rs. 93.20 billion in 2005-06 to Rs. 99.45 billion in 2006-07. The NHDP envisages an investment of Rs. 2,200 billion on concessions/contracts to be awarded by 2012;

q       Special accelerated road development programme for the North Eastern region at an estimated cost of Rs.46.18 billion has been approved. The Government has also decided to develop 1,000 kms of access controlled Expressways.

q       ‘Bharat Nirman’ to focus on 6 components of rural infrastructure including irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity.

q       Outlay on `Bharat Nirman’ increased from Rs. 121.60 billion to Rs. 186.96 billion.

q       Increase in outlay from Rs. 45 billion to Rs. 71.21 billion with the objective of improving the pace of implementation of irrigation projects.

4.     Significant capacity expansion is announced

Many expansion projects are announced by different groups in the cement sector.

Some of the major expansions are:

q       During FY2007, ACC plans to expand capacity at its Rajasthan plant from 0.6 mtpa to 1.6 mtpa at a cost of Rs.4 billion. It is also expected to invest in expansion of grinding capacities at various plants. With these Brownfield expansions, the company’s installed capacity is expected to increase by around 2 mtpa in FY2007.

q       Grasim Industries is planning to expand capacity by 8 mtpa in both Greenfield and Brownfield projects in Rajasthan at an estimated cost of Rs. 24.75 billion.

q       Madras Cements is planning to set up a 2 mtpa Greenfield unit in TN at a cost of Rs. 6.12 billion, and an additional clinker facility at its existing plant in AP at a cost of Rs. 4.39 billion. The clinker facility is expected to result in increase in cement production capacity at its AP unit from 1.6 mtpa to 3.6 mtpa. The new unit and the clinker facility are expected to be operational during Q4FY2008 and Q2FY2008, respectively.

q       India Cements plans to set up a 2 mtpa plant in HP at a cost of Rs. 7.5 billion. The plant is expected to be operational in 2010-11. India Cement is also expanding capacity at its existing plants by 2 mtpa.

q       Shree Cement plans to set up a new 1.5 mtpa plant at Rajasthan at an approximate cost of Rs. 4 billion. The plant is expected to be operational by FY2008.

q       OCL India plans to increase its capacity by 2.4 mtpa at its existing plant in Orissa at an investment of Rs.7 billion. The project is expected to be commissioned by September 2009.

q       Gujarat Ambuja group company-Ambuja Cement Eastern-is expanding capacity at its clinker unit in Sankrail, West Bengal at an investment of Rs. 8 billion. It is also setting up a greenfield plant in West Bengal. Post-completion by end-FY2007, the company’s installed capacity is expected to increase from 2 mtpa to 3 mtpa.

q       Heidelberg Cement plans to expand its capacity to 5-10 mtpa over the next three years.

q       Lafarge is planning to expand capacity by 2 mtpa at its Sonadih plant in Chattisgarh.

q       Binani Cement plans to increase capacity by 2 mtpa at its cement plant in Sirohi, Rajasthan.

q       The Jaypee group plans to invest Rs. 30 billion by 2007 to increase capacity from 6.5 mtpa to 15 mtpa.

5.     Demand / Supply balance

During the years 2005/2006 the Demand / Supply gap for cement in India has rapidly narrowed, leading to temporary shortages in some regions of the country. The Gap may widen from 2009 due to capacity expansions assuming that the announcements made by different groups in the country materialize in time.

The demand is expected to grow by 8% per annum in which case domestic supply will always be ahead of demand of cement in the country as shown in Figure 4. But if demand grows by 11% per annum then there is a chance of demand being higher than supply leading to a cement shortage in the country. Seasonality in demand of 15-20% will require higher capacity levels to meet peak

demand during the season.

6.     Mergers and Acquisitions-

            The booming demand for cement, both in India and abroad, has attracted global majors to India. In 2005-06, four of the top-5 cement companies in the world entered India through mergers, acquisitions, joint ventures or greenfield projects. These include France‘s Lafarge, Holcim from Switzerland, Italy‘s Italcementi and Germany‘s Heidelberg Cements. While Lafarge is investing over US$ 500 million in India to expand capacities by six million tonnes, Italcementi will invest US$ 174 million over the next two years in various greenfield and acquisition projects.

The Indian cement industry has also witnessed a flurry of mergers and acquisitions within the domestic players, bringing smaller players under the umbrella of larger companies, and larger companies coming under the umbrella of global players like Holcim and Heidelberg. The top two groups in the industry, Aditya Birla Group and Holcim Group, is expected to control more than 45 per cent of total capacity in the country. Second tier players will control approximately 15-20% of the total capacity; remaining single plant operations might get partially absorbed over time. Further, more global majors will control a quarter pie of total capacity.

Private Equity players keen to invest in cement companies

Domestic and international private equity (PE) players are eyeing the cement industry and are actively exploring investment avenues, according to industry experts. Keeping in line with the increasing interest in investing in infrastructure development, many cement plants in the country are currently on the radar of international and national PE fund providers. Many cement company managements are being approached by global PE players, especially from the US and Europe as per the informal information available within the industry. As most of the cement plants are either implementing or planning expansion, PE players find it the right time to chip in with significant investments.

7.     Exports

As cement is primarily a regional commodity, international competitiveness is not really a serious issue. However, in times of oversupply in the domestic market, being competitive ensures access to the export market. The export performance of Indian Cement industry has been healthy in recent years and has witnessed growth at a CAGR of 20.1% during FY2004-06. During FY2006, cement exports were higher by 47.7%. There has been a significant year on year variation in the export trend, implying that companies rely on cement exports to balance out the domestic demand supply situation.

Global demand for cement is forecast to grow 4.7 percent annually to 2.8 billion metric tons in 2010. China, which is already by far the largest market for cement in the world, will register the biggest gains in terms of the total amount of cement sold. Other developing parts of the Asia/Pacific region and Eastern Europe, as well as a number of nations in the Africa/Mideast and Latin America regions, will also record above-average cement market gains, fueled by a robust construction outlook. Vietnam, Thailand, the Ukraine, Turkey and Indonesia will record some of the strongest increases in percentage terms. Market advances will be less robust in the developed areas of the US, Japan and Western Europe, with maintenance and repair construction accounting for much of the growth in cement demand through 2010. However, a pickup a construction spending in Germany and Japan following an extended period of decline will help bolster overall developed world market growth.

However as cement is a low value, high bulk commodity, freight cost becomes a significant factor in determining the landed cost of cement. This has resulted in a very low volume of international trade in cement. Also in India domestic demand is rising as we can infer from the decline of clinker exports from 5.99 mt to 3.18 mt in 2006 due to increased domestic demand. We have to thrust for bulk transportation which can lead to significant advantages such as savings in freight costs and packing costs, avoidance of transit loss, adulteration, pilferage, bursting of bags and damage to cement.

8.     Future Modernization Needs of the Indian Cement Industry

Although the industry has largely set up plants with energy efficient equipment, there are still some areas for further improvements like:

q       Appropriate pre-blending facilities for raw materials

q       Fully automatic process control and monitoring facilities including auto samplers and controls.

q       Appropriate co-processing technologies for use of hazardous and non hazardous wastes

q       Interactive standard software expert packages for process and operation control with technical consultancy back-up

q       Energy efficient equipment for auxiliary/minor operations

q       Mechanized cement loading operations, palletization/shrink wrapping

q       Bulk loading and transportation, pneumatic cement transport

q       Low NO_x/SO₂ combustion systems and precalciners

q       Standards for making composite cement so that all the flyash and other industrial waste viz. slag are fully used.

q       Co-generation of power through cost-effective waste heat recovery system (only one demonstration unit in operation)

q       Horizontal roller mills (Horo Mills) for raw material and cement grinding

q       Advanced computerized kiln control system based on artificial intelligence

9.     Conclusion

The Indian cement industry has strong capacity base and produces quality cement that meets the global standards. It has achieved a tremendous success in technological upgradation and assimilation of latest technology and will be continuing to do so. There is also great scope for increase in export of cement.

More importantly, the gap between cement demand and supply has been reduced to a very large extent and the sector is likely to witness higher growth in the coming years. All this indicates that the cement industry has an important role to play in the Indian economy. Owing to booming housing sector, global demand and increased activity in infrastructure development such as State and National highways, there exists ample investment opportunities in the industry. It has been attracting the top cement companies from all over the world and promoting more mergers and acquisitions for its overall growth.

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.