Cement Sector Analysis Report

The Indian cement industry is the 2nd largest market after China accounting for about 7-8% of the total global production. It had a total capacity of about 330 m tonnes (MT) as of financial year ended 2011-12. Cement is a cyclical commodity with a high correlation with GDP, growing at around 1.2x of GDP growth rate. The housing sector is the biggest demand driver of cement, accounting for about 64% of the total consumption. The other major consumers of cement include infrastructure (17%), commercial & institutional (13%) and industrial segment (6%). Despite the fact that the Indian cement industry has grown at a commendable rate in the last decade, registering a compounded growth of about 8%, the per capita consumption still remains substantially poor when compared with the world average. This underlines the tremendous scope for growth in the Indian cement industry in the long term. Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. The Southern region of India has the highest installed capacity of about 120.1 mtpa. Given the high potential for growth, quite a few foreign transnational companies have ventured into the Indian markets. Already, while companies like Lafarge, Heidelberg and Itali cementi have made a couple of acquisitions, Holcim has increased its stake in domestic companies Ambuja Cements and ACC to over 50% to gain full control. Consolidation has taken place with the top two cement groups controlling nearly one-third of the total domestic capacity. However, the balance capacity still remains quite fragmented.

Key Points
Supply: The demand-supply situation is highly skewed with the latter being significantly higher. Demand: Housing sector acts as the principal growth driver for cement. However, industrial and infrastructure sectors have also emerged as demand drivers. Barriers to entry: High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier. Bargaining power of suppliers: Licensing of coal and limestone reserves, supply of power from the state grid etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern. Bargaining power of customers: Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. However, things are changing and few

brands have started commanding a premium on account of better quality perception.

Competition: Intense competition with players expanding reach and achieving pan India presence.

Financial Year '12

During the financial year 2011-12 (FY12), Indias cement production grew by 6.2% year-onyear. The muted growth was mainly attributable to slowdown in construction activities, extended monsoon, delay in infrastructural projects and the overall downturn in the economy. As such, the capacity utilisation levels stood lower at 73.7%. The industry witnessed high operating costs, particularly those of energy and freight. The price of imported coal went up sharply. The steep depreciation of the rupee and hike in diesel prices further aggravated the concerns. However, the industry witnessed some recovery in demand from November 2011 onwards.

Prospects
The growth of the Indian economy has slowed down in recent times on account of the rising inflation, high interest rates, high prices of commodities and fuels. The growth prospects of the cement industry are closely linked to the growth of the overall economy in general and the real estate and construction sectors in particular. The importance of the housing sector in cement demand can be gauged from the fact that it consumes nearly two-thirds of the countrys total cement. If the slowdown in real estate persists for an extended period, it would impact the growth in consumption of cement. However, the long term drivers for cement demand remain intact. Higher infrastructure spending, robust growth in rural housing and peaking interest rates are likely to augur well for the cement industry. The government plans to spend US$ 1 trillion on infrastructure in the 12th five year plan period (2012-17). The same during the 11th plan period was US$ 514 bn. The focus on infrastructure development is expected to boost cement demand.