2015 will be another year of more consolidation in the cement industry where quality players may take over smaller inefficient and high cost players with weak cash flows.
As per reports, the results of the government?s initiatives have already started reflecting in the growth of the cement industry to 8.5 per cent in the first eight months of the current fiscal. If this momentum gains further, the cement demand will again pick up a double digit growth. Even with 10 per cent growth, this will accelerate the cement production by over two-and-a-half times, to 665 MT in the next ten years, i.e. by 2024, which would require a cement capacity of around 750 MT at 90 per cent utilization. This will call for an additional investment of about Rs 2.5-3 lakh crore for creating another 390 MT of cement capacity. Concretisation of roads, dedicated freight corridors, development of smart cities, metro rail projects, are some of the major thrust areas of the government, which will drive cement consumption in coming year. At the same time, as per industry sources, 2015 will be another year of more consolidation in the cement industry where quality players may take over smaller inefficient and high cost players with weak cash flows. Impact of consolidation According to Manoj Misra, Chairman and Managing Director, Cement Corporation of India, large cement players in India will use the acquisition route to enhance capacity and market share; and in the long term smaller plants will not be able survive. Says Misra, ?The top five players will hold 70-80 per cent of capacities and market in the next decade; there is expectation that more global players would come into India as they would like to get a foothold in the market as the demand will propel in the emerging economies.?

Says Prashant K Tripathy, Group Head – Manufacturing, Dalmia Cement Bharat, Cement industry has experienced more change in the last decade than its entire history. With the demand in the cement sector poised to grow over 9 per cent in the next two years, increase in prices is a huge concern. Thus, consolidation helps in stabilizing prices? Tripathy adds,?There has been and increased focus on infrastructure and development with growth in demand in housing and industrial sector, with growing Indian GDP. Entry of foreign cement players resulted in the consolidation of the fragmented industry. Large number of mergers and acquisitions were witnessed in recent years.?

Explaining to what extent this is going to alter the market structure Misra adds, ?To better serve their markets, companies will combine their operations and streamline their offerings. Efficiencies of scale allow businesses to reduce costs and prices and ease decisions for potential investors. As a business segment ages and matures, numerous companies may find themselves offering the same products, at roughly the same price and quality, to the same market. The competition drags down sales and profits, while businesses struggle to innovate and remain viable. The answer in this situation is market consolidation: the takeover of the small by the strong through outright purchase or merger. By merging or acquiring, combining operations, closing factories and reassigning workers, a firm can reduce costs and improve profit margins. In addition, cutting redundant administrative workers and combining sales and marketing divisions can significantly lessen labour and head-office costs. This action reduces competition and tends to boost prices. That?s not so good for the consumer, perhaps, but it?s a natural cyclical development in the business realm.? He further adds, ?Global giants like Holcim and Lafarge have joined hands and their estimated capacity in Indian market is now at 65 million tonne. Indian giant Aditya Birla is also in the mode of acquiring and merging with small units throughout India to maintain its leadership position. AB group has also expanded its capacity to 59 million tonne, but has plans to enhance further to maintain its leadership. Hence the cement industry will be controlled mainly by two giants. The market will be dictated by the two groups in matter of pricing and supplies.?

Speaking about the positive impact of consolidation in the cement industry, Arvind Pathak, Chief Executive Officer, Reliance Cement Company says, ?Consolidation being witnessed in the industry is good and is in the right direction. Serious players increasing stakes in terms of manufacturing capacity is a good indicator of long term growth and stability for cement markets. Large players given the available financial headroom and scale of operation are expected push the industry towards operational efficiency and better service quality to the consumers. Consolidation will ensure not only healthy competition but also high level of quality and service assurance to the end consumers.? He adds, ?The Indian cement markets are poised for unprecedented growth on the back of both infrastructure as well as growth in the housing sector. This can be witnessed in the structural changes in the Indian economy being proposed by the present government. Reliance Cement is gearing up accordingly to cater to the upcoming demand and our capacity addition plans are in line with the expected demand in the coming years.?

Says Noopur Jain, Assistant Vice President, ICRA, ?Of late, there has been some activity of acquisition in cement industry. Indian cement industry is still fragmented and can see some consolidation of assets to synergise. But I have not seen any exits by most companies except those who are facing liquidity crunch. More than consolidation, the more important input in pricing will be the demand-supply because although some sort of consolidation is happening by way of acquisitions, it is not changing the structure of the industry.?

Capacity utilization
After expanding at an average rate of 8-10 per cent in the last three decades, the cement growth in 2013-14 had dwindled to 3 per cent, the lowest in the last 20 years, due to slowdown in the economy and deceleration in the construction activities. With cement production at 256 MT against a capacity at 360 MT, the cement industry was saddled with an idle cement capacity of over 100 MT valuing a colossal dead investment of over Rs 70,000 crore at today?s cost. What will be the impact of lower capacity utilization on the industry as a whole? Says Tripathy, ?We are expecting that the capacity utilization in 2015-16 will be better than current financial year, giving a positive impact on the company bottom-line. The advantages of consolidation have been witnessed for over a decade now since sustained merger and acquisition activity in cement has led to much improvement in profitability and valuations in the sector.? He adds, ?During 2007-12, the cement capacity in India almost doubled to around 300 MTPA. Our capacity utilisation has adequate margin in the Tamil Nadu and AP plants therefore we may be able to fulfill the market demands. Our cement plants in India have grown manifolds in terms of capacity; we are also acquiring some new plants to increase the volume and expand further.?

?While it may be correct when we say the cement industry is projected to operate at 70-75 per cent in the near terms – a closer look at the expected regional performance is required. The central region where Reliance Cement is currently present is expected to operate far better than other areas. Our expectation is that the capacity utilisation in this region would be close to 90 per cent if not more and hence we foresee a positive impact on our performance,? says Pathak. He adds, ?We have current capacity of 5.8 MTPA, operating from four locations – Maihar (Satna), Kundanganj (Raebareilly), Butibori (Nagpur) and Durgapur. We have another 10 MTPA in the immediate pipeline. Capital expenditure is expected to be in the range of Rs 7,000-7,500 crore.?

Cement industry was at its all-time low in FY 14 with a marginal growth by 3 per cent and there was an excess capacity. Now we see a reversal in that trend as the demand has grown. In the first eight months of the current FY, the demand has grown by 8.5 per cent as compared to 3 per cent last fiscal. Says Jain, ?In the previous fiscal, since there was excess capacity existing, there was a slowdown in fresh capacity additions. With the demand is growing now, we expect the excess capacity to be absorbed by the industry in the next 2-3 years and expect the utilization level to improve in medium term from around 72 per cent to 78 per cent by 2017. As per industry trends, the capacity addition in the next two years is going to be in the range of 20-25 million tonne per annum. However, some of these projects will be running with delays and may face execution challenges or they may come up in the middle of the year with the effective capacity addition. I think the demand improvement will be the key for the overall utilization level to improve in future. Also the stable government at the Centre has taken steps to speed up the execution of various projects. All these are going to materialise in the coming 2-3 years.?

Jain adds, ?Although the utilisation level will improve from the current level of 70-72 per cent to 78-80 per cent in a couple of years, it will be still lower than what we saw in the peak of FY 06 and FY07 when India was witnessing a very high growth rate. That time the utilisation level touched 90s and even 100 per cent.? According to him even though there is a surplus capacity in the system, most of the cement players will keep announcing new capacities. This is because many existing plants are very old and they won?t be so efficient. So the players will set up new facilities to increase operational efficiency.

Speaking about the demand scenario, Misra says, ?The metro rail projects in Mumbai, Bangalore and Hyderabad and the expansion phase in Delhi drive cement demand in this segment. Concrete roads and national highways, rural linkage roads, development of smart cities, hydel dams, river canal lining and linkage and many other infrastructure related. Airports modernization across major cities will also expand demand. Huge demand of cement is expected to emerge as the above projects are expected to roll out in the entire country. With the huge demand coming, greenfield and brownfield units are going to be set up and by 2020 it is expected that the installed capacity in India would be 500 million tonne.? Misra adds, ?With CCI and its present operating units at Tandur in Telangana, Rajban in Himachal Pradesh (nearer to Uttarakand) and Bokajan in Assam will have the opportunity to maximize its capacity utilisation. We are in process of setting up a new clinkerisation unit at Bokajan and close circuiting at Tandur and Rajban to enhance the existing capacity.?

Challenges
Speaking about the challenges Jain says, ?On the demand side, there needs to be a big push from the government sector to speed up investment in infrastructure and housing, which is happening but it is to be seen whether this is happening on a sustainable basis. Major challenge faced by the industry is the cost. Major cost components are the freight cost, power and fuel cost and raw material cost. The raw material cost is increasing at a steady level, but the freight cost increase is steep due to increase in diesel prices and subsequent raise of freight rates by Indian Railways and other transport and logistics firms. This is happening at a time when the industry is already facing the slowdown.?

Misra is on the same page. He says, ?The rising cost of production attributed mainly due to high price of energy and coal is adversely affecting the industry. Also there is at time the issue of availability of railway rakes. Transportation at times by road and especially for loose cement movement is a challenge in front of the industry. Another aspect is the taxes which forms about 60 per cent of the price of cement (taxes/duties direct and indirect). There is a pressing need to rationalise the tax structure.?

Pathak had this to say. ?It may be observed that while the manufacturing facilities are concentrated around the limestone belts these facilities are catering to the entire nation. Cost of logistics account for over 35 to 40 per cent of the total delivered cost of cement to the end consumers. Innovations have taken place in terms of adoption of split grinding/blending facilities bringing down the cost of logistics however; availability of railway infrastructure (rakes, reach and unloading facilities), roads and fragmented transportation service providers pose a major challenge to the industry to increase efficiency in terms of total delivered cost of cement. We as an industry have to start looking at sea route and inland water ways to effectively and efficiently cater to the upcoming demand and start investing in developing these infrastructures. Says Tripathy ?Our current capacity is 20 million tonne of cement including the group plants in Odisha and newly acquired Bokaro grinding unit. We have existing plants in Tamil Nadu three lines, AP one kiln, Meghalaya one kiln and a grinding unit in Assam near Guwahati. We are currently executing two green field projects, one near Belgaum in Karnataka and the other one in Assam. These two projects will be commissioned in year 2015 and will add another 3 million tonne to our current capacity making a grand total of 23 million tonne per annum.?

However, the long term growth seems to be intact. The government?s continuous thrust on and commit?ment for, affordable housing, construction of cement concrete roads, creation of 100 smart cities, world-class infrastructure development, with emphasis on development of freight corridors and ports connectivity should give a definite fillip to the creation of more demand for cement in the country.

Agith G Antony with input from Sudheer Vathiyath