Cement Industry

By - Amit Puri and Samrin Shaad

Growth and India can easily be taken for synonyms in recent times. It’s not just for the potential of IT and ITES sectors that India is considered a goldmine, but also in a lot of other sectors, the prerequisites, of course, is that investments are made in key areas which would be the drivers for future growth. The top slot for the key areas would easily be taken up by the infrastructure sector. Not only does the sector have enormous scope for growth in itself, it is an important component of the entire growth eco-system.

The cement industry would play a crucial role in building up the infrastructure required for aviation, transportation, ports, and fuel terminals (for energy requirements) amongst others.

The Cement Industry in India has made major strides ever since inception of the first cement plant in 1914 with a humble capacity of 1000 tons/annum. At 145 metric tones a year the country is the second largest producer of cement producing around 5% of the global produce.

GLOBAL SCENARIO
DemandCement demand throughout 2006 will remain strong with growth expected in most countries. There are exceptions, notably the Philippines, Malaysia, the UK, Switzerland and Germany. As expected, the emerging markets are on course to register high annual growth rates. In the Middle East, India and Vietnam, rates of 8% are on the card, while in other countries rates of 3% to 6% have already been reported.

The shift of focus
In the recent Building Materials Report from Exane BNP Paribas, there was much mention of the shift in the centre of gravity of the cement industry to the East, and from the mature markets to the emerging markets. Asia represents 70% of global cement consumption, with China accounting for about 45% of the world total; by 2020 the emerging markets are expected to represent 90% of world consumption. For the period 2005 – 2010 it is anticipated that there will be a net increase in capacity of 648 million ton stream, of which 63% will be in Asia and 15% in the Middle East, two regions in which the European players have a relatively limited presence.

Middle East
With regard to the Middle East countries, there are two important factors that could be influencing the decision makers: oil prices and the geopolitical situation in the Middle East. Construction output in these countries has always been correlated to oil process. If demand slows and does not match expectations of increased cement capacity there could be intense domestic price competition and surplus capacity would have to be exported, out of a region that is currently importing about 15% of global sea-borne cement.

The international cement groups as well as the domestic producers in the Middle East will be carefully watching oil prices, as a fall from the high levels and revenues that have been fuelling the construction industry in many parts of the region could severely affect cement demand.

Expansion optionsThere is also another interesting aspect of the latest developments in the cement industry and that is an increase in vertical integration, in which companies are looking to control downstream activities. The acquisition of aggregates companies or ready mix concrete operations (such as that of AggregateIndustries by Holcim, or RMC by Cemex) can offer a deterrent to imports. An oversupply of cement in some of the rapidly expanding regions could set off a price war in the mature markets and the established players will want to protect their domestic interests, by becoming both producer and customer.

THE INDIAN SCENERIO
The Indian cement industry is fragmented across the length and the breadth of the country with a few clusters. Cement being a transportation intensive industry the fragmentation provides an opportunity. Road is the preferred mode for transportation upto 250 km but the industry is highly dependent on the roads as the railway infrastructure is not adequate, there is an acute shortage of wagons.

Consumption
Indian per capita consumption of cement is only about a third of the world average. Even though India stands fourth in the tally of cements consumers across the globe it easily has the capability of being the second largest consumer behind China, which, as per the estimates, would continue to be the largest consumer of cement. An additional 12 million tons per annum would need to be added to the current Indian capacity to keep up with the growing demand. There aren’t a lot of Greenfield projects in the pipeline to add to the capacity thus it would create a favorable demand-supply scenario.
However, cement consumption per capita in our country at about 115-kg/ capita is one of the lowest amongst other countries. A simple comparison with the rest of the world would prove the point, the figure for China, for instance is 450 kg/capita. Similarly in Japan it is 631 kg/capita while in France it is 447 kg/capita, while the world average is about 250 kg/capita.

Energy EfficiencyAs for energy and pollution norms, the best performers in the country perform almost at par with the best around theglobe (thermal energy Kcal/kg of clinker – India 665 against 690 of Japan and pollution norms SPM of 40 in India against 20 of Japan) but the average performers lag far behind the global average.

Demand Supply
Cement demand has posted a healthy growth rate of 11.16% in the current fiscal. This is in tandem with strong economic growth of the country. The GDP growth in the current fiscal is expected to be in excess of 8.1 per cent and during the half year Jan-June 2006, cement industry grew around 12.2 % as compared to 10.5 % for the corresponding previous year.

During 2005, the industry produced and supplied over 136 million tons of cement, including export of 9 million tons of cement and clinker. The industry capacity was 157 million tons. The industry achieved production of 141.81 million tons in fiscal 2005–06 compared to 127.57 million tons during corresponding previous year.

The strong growth in the cement sector has been fuelled by various sectors which are witnessing strong growth themselves. They are:

Ø Growth in housing sector (over 30%)-a key demand driver;
Ø Infrastructure projects like ports, airports, power projects, dam & irrigation projects
Ø National Highway Development Programme
Ø Bharat Nirman Yojana for rural infrastructure
Ø Rise in industrial projects
Ø Export potential is also a demand driver

Capacity UtilizationThe capacity utilization has improvedover the years, the current level of capacity utilization is pegged at 90% which in itself is a benchmark the world over. Not being able to add capacity rapidly has been a blessing in disguise for the industry as it has enabled it to attain such a high level of productivity.

THE CONSOLIDATION
In the past 3 years the Indian cement industry has undergone dramatic changes, the takeover of L&T cement division (UltraTech) by Grasim (Aditya Birla Group) was only the beginning of the consolidation that was to follow. The top five players control almost 50% of the capacity; the remaining 50% of the capacity remains pretty fragmented.

Global participation
The consolidation so far has not been limited to the home grown players; a lot of foreign players are keen to get into the Indian market. The newfound interest of the global bigwigs in the Indian cement arena has a pretty simple reasoning behind it; huge potential for growth in the medium and the long run, and a strategic base for a possible injection of cement at competitive prices to China and other Asian Countries.

It would only be unfair to expect that the global bigwigs would sit back and watch without being part of the action. Its no wonder that the top ones (Lafarge, Holcim and Heidelberg) have increased their investments in India.
The added advantage
The government initiatives to extend a variety of incentives to the industry to spur growth in the housing and other infrastructure sectors is only going to increase cement demand in the medium term. Having mentioned earlier that the per capita cement consumption in India is very low, the multinational majors see a huge potential for this pie to grow and thus are eager to have a slice through acquisitions.

The acquirer and the acquired
The following acquisitions have happened in the recent past
Grasim: UltraTech(L&T)
ACC: IDCOL
Lafarage : Tisco, RaymondsGujrat Ambuja :DLF, ACCCement FranCais : Zuari
Heidelberg : Mysore Cement
Holcim: Gujarat Ambuja

It’s interesting to note that ACC took over state-owned Industrial Development Corporation of Orissa Ltd (IDCOL) in Dec 2003, only to be merged with by Gujarat Ambuja which in turn has been taken over by Holcim recently. ACC and Gujarat Ambuja are now the two arms of Swiss cement giant Holcim with a 24 per cent share of the Indian market and nearly 35 million tons capacity.

OUR VERDICTThe Indian Cement Industry is evolving and evolving for the good. The action that we have seen is not the end, it is would continue for some time. Though the bigger players have created bigger entities there have isolated smaller entities who would eventually have to come together either to grow or be part of some bigger entity. The cement market is on a growth path(refer other article in this issue on Realty Boom) and as they say “make hay while the sun shines” we expect more global players to enter this growing market.