Executive SummaryD&B Industry Research Service’s report on the Indian cement industry studies thevarious dimensions of the industry and assesses the future prospects for the industry. Inaddition to this, D&B Industry Research Service also encapsulates the emerging trends inthe cement industry and analyses some of the industry’s major concerns.Some of the emerging trends and major concerns of the Indian cement industryanalysed in this report are:• Fragmentation in the industry• Rising share of blended cement production• Possibility of excess capacity in the cement industry post FY09• Adequate availability of coal – a major fuel for the industry• A well connected logistic network – a major requisite for the industry• Greater movement of cement through the bulk route• Increasing pace of consolidation with entry of global cement majors• Possibility of fall in cement exports, along with marginal cement imports into thecountry• Intense competition necessitating changes in company strategies• Vertical integration by cement companiesSection I – Industry dynamics deals with the environment in which the cement industryoperates, and covers the various facets that determine the dynamics of the industry. Thecement industry is one of the basic infrastructure industries and is a significantcontributor to the Indian economy in terms of employment generation, tax revenues,and industrial growth. The per capita consumption of cement is considered an importantindicator of the country’s economic development, as it is used in almost every sector.Government policies, competition and ensuing consolidation activities in the Indiancement industry over the years has given rise to an oligopolistic industry structure.Though the concentration of capacities among the larger players has increased in recenttimes on account of consolidation activity, the industry still exhibits some degree offragmentation. Around 60 per cent of the total capacity is scattered amongapproximately 50 large cement companies and over 200 mini cement plants. There isthus scope for further consolidation activity in the industry.The cement industry is currently in the midst of an interesting phase of robust demand,very high capacity utilisation and firm prices. Demand for cement in the domestic marketremains robust, driven by demand from all user segments. Demand from the housingsector continues unabated driven by rising income levels, fiscal incentives and amoderate interest rate regime. The rapid growth recorded by the services sector has ledto robust demand for commercial real estate and thus demand for cement. In addition,the government’s keenness to improve the infrastructural facilities in the country and thesurge in industrial investments has led to higher demand for cement from these twosegments. Domestic cement consumption grew at an accelerated pace of 9.4 per cent(CAGR) during FY04-FY07 as compared to a CAGR of 7.5 per cent over the last 15 years.Domestic cement production has kept pace with the rise in cement consumption.Additionally, the industry has witnessed a greater acceptance of blended cement. This isreflected in the steady rise in share of Portland pozzolana cement (PPC) in total cementproduction from 19.1 per cent in FY99 to 60 per cent in FY07. Unlike production, capacityadditions in the industry tend to be bunched together, given the indivisible nature of
investments in the industry. The bunching up of capacity additions distorts the demand-supply equilibrium in the industry and has an adverse effect on the industry’sprofitability. The industry witnessed substantial additions to capacity in FY02, which ledto an overcapacity situation. However, since then incremental capacity additions haveslowed down and the demand-supply equilibrium has been restored. Consequently, theindustry has observed an increase in the operating rates and in prices.The industry is now investing heavily in augmenting its cement capacity to be able tocater to the expected rise in demand. The planned capacity additions in the cementindustry are likely to add (around) 80 million tonnes of capacity (FY08-FY10). On-timecommissioning of these capacities could tilt the demand-supply situation towardsovercapacity. However, capacity additions are likely to miss the scheduled deadline dueto delays on various fronts, such as environmental clearances, delays in supply ofequipment, among others. A situation of overcapacity in the cement industry is thereforelikely to emerge post-FY09.On the resources/inputs front, while there are no problems with respect to availability oflimestone, there are concerns with regard to availability of adequate quantity of coal — amajor fuel — to the industry. Coal receipts by the cement industry have been lower thanthe assured coal linkages granted to the industry. In a recent policy change, thegovernment has reduced the assured coal supply to around 75 per cent of the cementindustry’s total coal requirements. Cement companies are resorting to coal imports anduse of alternative fuels (pet coke, lignite) to meet their fuel requirements.Logistics is another area of concern for the industry, and distribution cost is one of themajor costs for the industry. Cement companies are working towards strengthening theirdistribution network, while concurrently trying to bring down distribution costs. Theindustry has witnessed a rise in movement of cement through the sea route. Most of thecement sales in the country occur through retail network in the bagged form. Theindustry is now witnessing a gradual change towards movement of cement through thebulk route. Split-location units are another move adopted by companies to cut down ondistribution costs. Under this concept, the clinkerisation unit is located close to thelimestone reserves, while the grinding units are located at 2–3 differentlocations, generally closer to the markets.Cement prices, being market determined, have risen sharply since March 2006 largelydue to an improvement in the demand-supply dynamics. Cement prices in most of themarkets are ruling at all-time highs. Due to the consistently high cement prices, thegovernment has adopted various measures to facilitate imports. This attempt is to easecement supply and thus rein in rising cement prices; prices have, however, continued torise.The rise in input costs has also contributed to the rise in cement prices. Energy, rawmaterial and distribution are the major expenses for the cement industry. The industry isconstantly working towards reducing these costs, through measures such as use ofalternative fuels, setting up captive power plants, and greater production of blendedcement.Section II – Global perspective analyses the scenario in the global cement industry.Globally, cement production has grown at a CAGR of 7.7 per cent over the last 6 years.The industry is, however, witnessing shifts in production patterns with most of the
growth occurring in the developing markets. China and India have emerged as thelargest producers and consumers of cement in the world. The global cement industry ishighly localised, with demand for cement in most of the countries being met by domesticproducers. Thus, international trade in cement is limited. Global cement exports accountfor only around 7 per cent of the total global cement production.Demand for cement is closely related to overall economic development and tends to varyacross countries, depending on the level of industrialisation and infrastructuredevelopment. Global cement majors are strengthening their production bases acrosscountries to mitigate the locational risk associated with operating in individual countries.This has led to increased consolidation activity in the global cement industry.Consequently, the level of concentration in the industry has increased and the top sixglobal players account for around 28 per cent of the global cement capacity. The pace ofconsolidation activity at the global level is likely to continue.With the Indian cement industry’s huge potential, the country could witness the entry ofmore global cement majors or the strengthening of production bases by existingcompanies. Global cement majors, who adopted the inorganic route to gain entry intothe Indian cement industry, already control a substantial part of cement capacity in thecountry.India’s share in international cement trade (exports) stood at 5 per cent in 2006. MiddleEast is one of India’s largest cement export markets, accounting for around 25 per centof India’s total cement and clinker exports. The region is witnessing substantial additionsto cement capacity and there are concerns of a possible fall in cement exports to theMiddle East from India. Cement and clinker exports from India declined in FY07, ascompanies diverted exports to the domestic market to capitalize on the higher domesticcement prices.The Indian cement industry faces a possible threat from imports, following the removalof all duties (basic customs duty, CVD and SAD) on imported cement. The threat is fromPakistan, India’s immediate neighbour, which currently has excess cement capacity.However, D&B Industry Research Service does not expect cement imports into thecountry to occur on a large scale, largely due to infrastructural constraints.Section III – Industry performance reviews the financial performance of the industryover the last 5 years. In line with the cyclical upturn in the cement industry, the financialhealth of the industry has improved considerably in FY07. The industry has recorded asharp rise in sales, and marked improvement in profitability. During FY07, its PBDIT(NNRT) margin improved by 9.3 percentage points to 28.9 per cent, while its net profitmargin improved by 7.4 percentage points to 16.8 per cent as compared with marginsearned in FY06. Cement companies across the sector fared well during FY07. Returnsrecorded by the cement companies also improved considerably. Backed by the strongcash flows and moderate interest rate regime, the cement industry has been able tobring down its debt-equity ratio, as also its interest incidence.D&B Industry Research Service expects the cement industry to continue recordinghealthy sales growth. However, rising input costs — coal, power tariff, prices oftransportation fuels — remains a cause of worry.
Section IV – Strategic insight reviews the level of competition in the industry, thegrowth prospects for the industry, and assesses the intensity of various risks the Indiancement industry faces. Competition in the Indian cement industry has intensified overthe last 2 years, with the global cement majors gaining a major foothold in the country.Cement companies are looking for innovative strategies to capture a substantial marketshare and survive amidst aggressive competition.The strategies adopted include non-price instruments such as branding, greaterexpenditure on advertising, innovative packaging, strengthening of their distributionnetworks as well as several customer-focussed initiatives. Companies are alsointegrating vertically by moving into the ready-mix concrete business in an attempt toretain their clients. Regional players are also moving out of their regions in an attempt toestablish a pan-India presence. This is expected to intensify the level of competition inthe industry.Prospects look bright for the Indian cement industry. Cement consumption would remainrobust, driven by higher offtake by all user segments, while prices would remain highbecause of the tightness in the demand-supply situation. Backed by these, the industryis expected to register rise in sales revenue during FY08 and FY09.Though there is immense growth potential, the Indian cement industry does face somerisks. These include poor infrastructure facilities in the country, possible slowdown inimplementation of government policies regarding infrastructure, among others. Thereare also concerns of a situation of overcapacity emerging in the industry leading to a fallin capacity utilisation rates