Cement industry

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  • 1. 1 V. DEVI SARANYA 1226113160 INDIAN CEMENT INDUSTRY Summary: The Indian cement industry is the 2nd largest market after China accounting for about 8% of the total global production. The housing sector is the biggest demand driver of cement, accounting for about 67% of the total consumption. The other major consumers of cement include infrastructure (13%), commercial construction (11%) and industrial construction (9%). The Indian cement industry increased in value at a compound annual growth rate (CAGR) of 13.14% during the review period (2007–2011), and is projected to grow at a CAGR of 10.64% over the forecast period (2012–2016). This growth is primarily attributed to the government's high level of infrastructure spending, and the country's increasing number of residential and commercial construction activities. The Indian government invested US$500 billion on infrastructure during the Eleventh Five-Year Plan (2007–2012) and revealed plans to invest a further US$1 trillion on infrastructure during the Twelfth Five-Year Plan (2012–2017). The large-scale investment on various infrastructure projects, including roads, railways, bridges and ports, will generate a huge demand for cement over the forecast period. Introduction: The Indian cement industry has some multinational cement giants, like Holcim and Lafarge, which have interests such as ACC, Ambuja Cement and Lafarge Birla Cement, the Indian cement industry is broadly home-grown.Ultratech Cement, the country's largest firm in terms of cement capacity, holds around 22% of the domestic market, with ACC (50%-owned by Holcim) and Ambuja (50%-owned by Holcim) having 15% and 13% shares respectively. Many of the remaining dozen top players are Indian and are (in order of diminishing market share); Jaiprakash Associates (10%), The India Cements Ltd (7%), Shree Cements (6%), Century Textiles and Industries (5%), Madras Cements (5%), Lafarge (5%), Birla Cement (4%) and Binani Cement (4%). Between them the top 12 cement firms have around 70% of the domestic market.Around 100 smaller players produce and grind cement on a wide range of scales but are often confined to small areas.
  • 2. 2 The Indian cement industry grew by 4.4% in 2011 and throughout 2012 significant cement capacity continued to come on stream in India. Numerous new projects were announced or mooted throughout the year, despite January 2012 reports that the industry was operating at as low as 65% of capacity. At the time cement companies blamed a decrease in government infrastructure spending in major cities. (PETER EDWARD, 2013) The cement industry of India is expected to add 30-40 million tonnes per annum (MTPA) of capacity in 2013. The industry has a current capacity of 324 MTPA and operates at 75-80 per cent utilisation. The cement and gypsum products sector has attracted foreign direct investments (FDI) worth US$ 2,625.90 million between April 2000 to November 2012. It is anticipated that the cement industry players will continue to increase their annual cement output in coming years and the country's cement production will grow at a compound annual growth rate (CAGR) of around 12 percent during 2011-12 – 2013-14 to reach 303 MMT. (INDIA MIRRORS, 2013) Market Size: The Indian cement sector is expected to witness positive growth in the coming years, with demand set to increase at a CAGR of more than 8 per cent in the period FY 2013-14 to FY 2015-16, according to the latest report titled ‘Indian Cement Industry Outlook 2016’ by market research consulting firm RNCOS. The report further observed that India’s southern region is creating the maximum demand for cement, which is expected to increase more in future. The cement and gypsum products sector has attracted foreign direct investments (FDI) worth US$ 2,656.29 million in the period April 2000–August 2013, according to data published by the Department of Industrial Policy and Promotion (DIPP). (IBEF, 2013) Investments:  ACC Ltd plans to invest Rs 3,000 crore (US$ 470.22 million) to expand its capacity by nearly 4 MT a year in three eastern region states, over the next three years.  Reliance Cements Co Pvt Ltd will set up a 3 MTPA grinding unit at an estimated cost of Rs 600 crore (US$ 94.04 million). The unit is likely to come up at Raghunathpur in Purulia, West Bengal.
  • 3. 3  Reliance Cement Co, a special purpose vehicle (SPV) of Reliance Infrastructure Ltd, is commissioning its first 5 MTPA plant in Madhya Pradesh. The project has been implemented at a cost of approximately Rs 3,000 crore (US$ 470.22 million).  Zuari Cement plans to set up a cement grinding unit at Auj (Aherwadi) and Shingadgaon villages in Solapur, Maharashtra. The new unit will have a production capacity of 1 MTPA and is expected to be operational by the second quarter of 2015.  JSW Steel has acquired Heidelberg Cement India's 0.6 MTPA cement grinding facility in Raigad, Maharashtra, for an undisclosed amount. (IBEF, 2013) Key issues in Cement industry: Recuperating Demand In the absence of any significant boost in infrastructure or real estate construction activity (which may be a result of a possible substantial reduction in interest rate), cement growth may remain in the range of 5%-8% in 2013. Before 2008-2009, the cement demand in India was largely driven by infrastructure activity. However, from 2010 the demand is driven more by the activity in the housing and commercial real estate sector (CRE). Before April 2010, the cement demand growth showed a positive correlation (0.33-0.55) with credit growth to infrastructure, construction and roads sector, with a lag of three to six months. However, after April 2010, the demand growth has shown a positive correlation (0.3-0.5) with credit growth of housing and commercial real estate sector, with a lag of six to nine months. Cement production volume grew significantly in 2012, driven by a relatively robust activity in housing and commercial real estate. From September 2010 to March 2012, the average growth in credit to the housing sector was around 15% and credit growth to commercial real estate was around 16%. However, during March-November 2012, credit growth to the housing sector moderated to 13%, while for CRE, credit growth averaged only 4%. This may imply a moderation in cement demand in the next six to nine months.
  • 4. 4 CEMENT GROWTH AND GDP: OVER CAPACITY AND CAPACITY UTILISATION: The pace of capacity addition to decline in 2013 since large capacity additions in anticipation of demand growth have already taken place during FY08-FY11. Growth in capacity additions is likely to be around 5%-6% in the next three years (FY12: around 5%). Overall capacity utilisation was 71% in FY12. Southern Indian companies’ capacity utilisation (FY12: 61%, FY11: 65%) is lower than that in other regions. The agency expects that capacity utilisation is unlikely to cross 70% till FY15 due to the continued demand-supply mismatch in this region. However, all India capacity utilisation is likely to improve with slow growth in capacity additions. Due to higher Input Cost and Pricing Pressure the sector may decline by 5%-10% yoy in 2013 given the expected moderation in demand compared with the demand surge observed in 2012. (INDIA RATINGS AND RESERCH, 2013)
  • 5. 5 CementIndustrycurrentscenario: Analysts expect cement sales growth to improve only marginally to 6.5% next year compared to 4-5% in the current fiscal year. The outlook for cement firms, as with most other industries, hinges upon an economic recovery. Sales in 2014 are expected to remain under pressure on the back of slower government spending as fiscal deficit concerns mount, and a slow recovery in the capital expenditure cycle by private firms. At the same time, higher costs may continue to weigh on the profitability of cement makers in the coming year. The cement demand may not pick up ahead of the general election due in May. Pre-election infrastructure spend may be constrained because the government is walking a tightrope, trying to curb the fiscal deficit to hold off threats of a rating downgrade even while growth is sluggish. Uncertainty about the new government is also making companies defer their investment plans. Secondly, given the slow recovery and excess capacity in the industry, prices may remain soft in the first half of the next year, say analysts. Average capacity utilization levels are expected to drop from a decadal low of around 70% in FY13 to 68% in FY15 due to capacity additions. The all- India average cement price for FY14 is estimated to remain nearly flat year-on-year versus an estimated increase of 1.5% in the current year. The excess capacity situation is bad enough for brokerages to downgrade their price hike estimates for financial year 2015 to 5.5% compared to 8% earlier. These factors will weigh on profit margins even as diesel and railway freight costs continue to escalate. Note that operating profit margins for the top ten cement players were the lowest in the last three years in the September quarter. The shares of cement companies have underperformed the market year to date with stock prices of top ten players down 6-50%. The recent run-up in share prices has made valuations slightly expensive. (KRISHNA MERCHANT, 2013)
  • 6. 6 REFERENCES 1. Ibef (2013), Cement industry in India http://www.ibef.org/industry/cement-india.aspx *2. India ratings and research (2013), An outlook on Indian cement manufacturers http://indiaratings.co.in/upload/research/specialReports/2013/1/10/fitch10Cement.pdf 3. India mirrors (2013), Indian cement industry at a glance http://www.indianmirror.com/indian-industries/2013/cement-2013.html 4. Peter Edwards (2013), The ‘Incredible’ Indian cement industry http://www.globalcement.com/magazine/articles/752-the-incredible-indian-cement- industry NEWS ARTICLE: 1. Krishna Merchant (2013), Cement companies may remain on shaky ground in 2014 http://www.livemint.com/Money/bap7EX4njz6UOZfNdCGfwM/Cement-companies- may-remain-on-shaky-ground-in-2014.html