Stable” Outlook For Cement Sector in FY 2016
Cement Demand Growth To Outpace Supply
India’s cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, from both Indian and foreign investors, making it the second largest in the world. The industry is currently in a turnaround phase, trying to achieve global standards in production, safety, and energy-efficiency.
India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major government initiatives such as development of 100 smart cities are expected to provide a major boost to the sector. Expecting such developments in the country and aided by suitable government foreign policies, several foreign players such as Lafarge, Holcim and Vicat have invested in the country in the recent past. A significant factor which aids the growth of this sector is the ready availability of the raw materials for making cement, such as limestone and coal.
The cement market in India is expected to grow at a compound annual growth rate (CAGR) of 8.96 per cent during the period 2014-2019.
In India, the housing sector is the biggest demand driver of cement, accounting for about 67 per cent of the total consumption. The other major consumers of cement include infrastructure at 13 per cent, commercial construction at 11 per cent and industrial construction at nine per cent.
To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT) capacity over the next three years. The cement capacity in India may register a growth of eight per cent by next year end to 395 MT from the current level of 366 MT. It may increase further to 421 MT by the end of 2017. The country’s per capita consumption stands at around 190 kg.
A total of 188 large cement plants together account for 97 per cent of the total installed capacity in the country, while 365 small plants account for the rest. Of these large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70 per cent of the total cement production of the country.
India’s Per Capita Consumption Set To Rise
As India’s current per capita consumption of cement (225 kg as of 21 May 2014) is much lesser than the developed and other developing economies, there is a significant business opportunity to cater the unmet and rising demand. In order to meet the rising demand, cement companies are expected to pent up production by around 56 MT in the next three years.
Upward Movement In Domestic Cement Consumption In India
Domestic cement consumption is to reach 324 million tonnes in FY15 from 165.63 million tones in FY11.The consumption is further expected to increase at a CAGR of 15.7 percent during FY11-17 and reach 398 million tonnes. Demand will be supported by infrastructure development in tier 2 and tier 3 cities. The country’s per capita consumption is around 225 kg as of May 2014, compared to the world average of over 350 kg per capita, which shows great potential for growth. The cement consumption growth rate in the country has witnessed a decline from 9.56 % in 2001– 02 to 5.50 % in 2014–15.
On the back of growing demands, due to increased construction and infrastructural activities, the cement sector in India has seen many investments and developments in recent times.According to data released by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum products attracted foreign direct investment (FDI) worth US$ 3,084.89 million between April 2000 and December 2014.
Some of the major investments in Indian cement industry are as follows:
Dalmia Cement (Bharat) Ltd has invested around ` 2,000 crore (US$ 321.12 million) in expanding its business in North East over the past two years. The company currently has three manufacturing plants in the region — one in Meghalaya and two in Assam.
JSW Group plans to expand its cement production capacity to 30 million tonnes per annum (MTPA) from 5 MTPA now by setting up grinding units closer to its steel plants.
UltraTech Cement Ltd has charted out its next phase of greenfield expansion after a period of aggressive acquisitions over the last two years. Following its takeover of two cement plants owned by the Jaypee group, UltraTech has plans to set up two greenfield grinding units in Bihar and West Bengal, according to O P Puranmalka, MD, UltraTech.
UltraTech Cement Ltd has agreed to buy two cement plants and related power assets of Jaiprakash Associates Ltd in Madhya Pradesh for ` 5,400 crore (US$ 867.28 million).
JSW Cement Ltd has planned to set up a 3 MTPA clinkerisation plant at Chittapur in Karnataka at an estimated cost of ` 2,500 crore (US$ 401.55 million).
Andhra Cements Ltd has commenced the commercial production in the company’s cement plants – Durga Cement Works at Dachepalli, Guntur and Visakha Cement Works at Visakhapatnam.
In the 12th Five-year Plan, the government plans to increase investment in infrastructure to the tune of US$ 1 trillion and increase the industry’s capacity to 150 MT.
The Cement Corporation of India (CCI) was incorporated by the Government of India in 1965 to achieve self-sufficiency in cement production in the country. Currently, CCI has 10 units spread over eight states in India.
In order to help the private sector companies thrive in the industry, the government has been approving their investment schemes. Some such initiatives by the government in the recent past are as follows:
The Government of Tamil Nadu has launched low priced cement branded ‘Amma’ Cement. The sale of the cement started in Tiruchi at ` 190 (US$ 3.05) a bag through the Tamil Nadu Civil Supplies Corporation (TNCSC). Sales commenced in five godowns of the TNCSC and will be rolled out in stages with the low priced cement available across the state from 470 outlets.
The Government of Kerala has accorded sanction to Malabar Cements Ltd to set up a bulk cement handling unit at Kochi Port at an investment of ` 160 crore (US$ 25.68 million).
The Andhra Pradesh State Investment Promotion Board (SIPB) has approved proposals worth ` 9,200 crore (US$ 1.47 billion) including three cement plants and concessions to Hero Moto Corp project. The total capacity of these three cement plants is likely to be about 12 MTPA and the plants are expected to generate employment for nearly 4,000 people directly and a few thousands more indirectly.
India has joined hands with Switzerland to reduce energy consumption and develop newer methods in the country for more efficient cement production, which will help India meet its rising demand for cement in the infrastructure sector.
The Government of India has decided to adopt cement instead of bitumen for the construction of all new road projects on the grounds that cement is more durable and cheaper to maintain than bitumen in the long run.
The eastern states of India along with the border states will be the newer and virgin markets for cement companies and will contribute to their bottom line in future. In the next 10 years, India will become the main exporter of clinker and gray cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country.
A large number of foreign players are also expected to enter the cement sector in the next 10 years, owing to the profit margins, constant demand, and right valuation. Cement companies will go for global listings either through the FCCB route or the GDR route.
With help from the government in terms of friendlier laws, lower taxation, and more infrastructure spending, the sector will grow and will take India’s economy forward along with it.
The Government of India has decided to adopt cement instead of bitumen for the construction of all new road projects on the grounds that cement is more durable and cheaper to maintain than bitumen in the long run. The Schedule Rate of Clean Energy Cess, levied on coal is being increased from ` 100 per tonne to ` 300 per tonne. The increase in the clean energy cess may lead to rise of power and fuel costs in the cement companies.Companies are trying to develop a niche market for RMC (Ready Mix Concrete). Penetration of RMC has been low at about 8 percent (USA: 88 percent; China:33 percent; Brazil:32 percent) because retail sales comprise mostly of bag cement.
Strong Demand Drivers in Near Term
The Housing segment accounts for a major portion of the total domestic demand for cement in India where Real estate market is expected to grow at a CAGR of 17.2 per cent over 2011–15 to USD126 billion. Growing urbanisation, an increasing number of households and higher employment are primarily driving the demand for housing, accounting for 67 per cent of the total consumption.
Initiatives by the government are expected to provide an impetus to construction activity in rural and semi-urban areas through large infrastructure and housing development projects respectively.
Housing Sector Cement Demand Lead In
Demand for cement is highly correlated with cyclical activities like construction and development. Housing sector accounts for a significant 64 percent of the total cement demand (USA:22 percent ; China:25 percent; Brazil 56 percent).Real estate market is expected to grow at a CAGR of 17.2 percent during 2011–15 to USD 126 billion. The rapidly increasing real estate industry in India is expected to push the demand for cement. Residential real estate demand is driven by rising population and growing urbanization. Rising income levels are leading to higher demand for luxury projects. Demand for affordable housing is growing in order to meet the demand from lower income groups. Commercial real estate demand will be driven by growth in IT/ITeS sector and organized retail.
The government is strongly focused on infrastructure development to boost economic growth and is aiming for 100 smart cities. It plans to increase investment in infrastructure to USD1 trillion in the 12th Five Year Plan (2012–17), compared with USD514 billion under the 11thFive Year Plan (2007–12). The government is strongly focused on infrastructure development to boost economic growth and is aiming for 100 smart cities It plans to increase investment in infrastructure to USD1 trillion in the 12thFive Year Plan (2012–17), compared with USD514 billion under the 11thFive Year Plan (2007–12).Infrastructure projects such as Dedicated Freight Corridors as well as new and upgraded airports and ports are expected to further drive construction activity,
The government intends to expand the capacity of the railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation costs. Infrastructure projects such as Dedicated Freight Corridors as well as new and upgraded airports and ports are expected to further drive construction activity. The government intends to expand the capacity of the railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation costs.
References:Media Reports, IBEF, India in Business, Cement Corporation of India, Department of Industrial Policy and Promotion (DIPP), Cement Manufacturers Association (CMA), McKinsey Quarterly Report, TechSci Research, Ministry of External Affairs