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CEMENT: OPPORTUNITIES & CHALLENGES
Oversupply, Volatility and Worse
Though Demand for Cement Continues to Grow, The Industry is faced with Ongoing Oversupply Issues and Volatile Prices leading to Margins getting Squeezed Even Tighter
Issue Date - 12/05/2011
 
Ever since it became more expensive to find good quality stone, cement has been used more and more commonly, although its use actually goes back to the Roman Times. Cement is produced throughout the world, but the largest producers are Brazil, China, Russia, USA and India. The Indian cement industry is the second-largest market after China.

In India, the cement industry is experiencing a boom on account of the overall growth of the Indian economy. The demand for cement, being a derived demand, depends primarily on the industrial activity, real estate business, construction activity, and investment in the infrastructure sector. India is presently passing through a positive trend of growth on all these fronts and hence the cement market is flourishing like never before. Fitch Ratings has commented that cement demand in India is expected to grow at 10% annually on account of rapid growth in housing projects, infrastructure activities and corporate capital expenditures. Housing and Infrastructure sectors consume around 55% and 35% of India’s cement output respectively and now act as a major driver of growth for the cement industry.

Interestingly, despite a growing demand for cement, capacity additions have created surpluses in some parts of the country and put pressure on prices. Cement companies have added a capacity of 89 million tonnes in the last three years with close to 45 million tonnes of fresh capacity being added during 2010-11 alone. The companies are expected to add 35 million tonnes of capacity by FY-13. Consumption was 179 million tonnes last fiscal.

As a global commodity, cement prices are affected completely by supply and demand worldwide. In 2010, for example, India experienced a 50% rise in the prices of cement as the housing market boomed. In the March quarter of the current year, cement prices shot up by 30% and so today, a 50 kg bag of cement is available at a price of Rs.290. However, despite price hikes, the net realisation of cement companies remains lower today than it was in 2007. Cement prices have shot up by around 60% in the last four years, but without any increase in the realisation for the cement manufacturers, mainly because of transportation and input costs. Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances is uneconomical. The Cement Manufacturers’ Association (CMA) has demand 50% freight subsidy for transportation of cement and clinker from the factory to port, as most plants are located in the hinterland. The overall supply position of railway wagons to the cement industry is much lower than the requirement even as the direct and indirect cost of railway transportation continues to rise. In December, the Railways changed the classification of cement resulting in 4-5% rise in the transportation cost. Though steel and cement are equally important materials needed for construction activity, the VAT rates on steel and cement differ vastly. While VAT on steel is only 4%, VAT on cement and clinker is 12.5%. Further, steel enjoys ‘declared goods’ status while cement and clinker are excluded.

 
Though India produces about 7% of the world’s cement, per capita consumption of the commodity in India is just 156 kg (2008) as against a world average of 396 kg (2006). At the beginning of the current quarter, sales figures were marginally up by 1.7% and in February, it improved to 7.2% upon growth in consumption. But to the disappointment of the industry, which was hoping of a 10% growth, the overall sales has seen an appreciation of just 4.4% for the last financial year. India currently has 291.3 mtpa (million tonnes per annum) of cement manufacturing capacity and an additional 34 mtpa is expected to be operational by the end of 2011. With plans to expand to two to three times their present capacity in the next 10 years, the cement industry is targeting to cross 400 million tonnes of produce. On the other hand, demand is anticipated to rise by 17 mtpa in FY 2011 aggregating to 217.6 mtpa. But with $1 trillion of infrastructure projects coming up from the government sector by way of development of roads, bridges, and railways over the next five years, demand for cement is going to remain high. On the whole, the capacity expansion appears to be in sync with the upcoming demand in the domestic as well as international markets, but to achieve the targets, the Rs. 77.8 billion cement industry will need to get rid of the bottlenecks first.

For the past one year, the short availability of raw materials like coking coal and gypsum has posed a big problem. Coking coal constitutes around 30% of total cement manufacturing cost and the recent floods in Queensland, Australia have triggered a steep rise in input cost. Jinal Joshi, Senior Research Analyst at Jaypee Capital says: “Even as the floods have eased now, the unpredictability surrounding the availability of raw materials has pushed cement companies to look for alternatives through a dedicated R&D or through acquisition of captive mines for raw materials, which range from gypsum, to coal to limestone.” For example, India Cements is developing mining in Indonesia and ACC has entered into a joint venture with the Madhya Pradesh government to develop coal fields.

          

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