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The Indian cement industry with a total capacity of about 165 m tonnes in FY07 is the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 50% of the capacity, the balance capacity still remains pretty fragmented.
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Despite the fact that Indian cement industry has clocked a production of more than 100 m tonnes for the last five consecutive years, the per capita consumption of around 130 kgs compares poorly with the world average of over 260 kgs and more than 450 kgs in China. This, more than anything underlines the tremendous scope for growth in the Indian cement industry in the long term.
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Cement, being a bulk commodity, is a freight intensive industry and transporting cement 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. While the southern region is excess in capacity owing to abundant availability of limestone, the western and northern region are the most lucrative markets on account of higher income levels.
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Given the high potential for growth, quite a few foreign transnationals have been eyeing the Indian markets and are planning to acquire domestic companies. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, majors like Holcim managed to partner a domestic company, Gujarat Ambuja, and acquire a stake in ACC. After acquiring stake in big companies, transnationals are now eyeing median capacity producers. However, it must be noted that the transnationals will find the going tough since cement is a game of volumes and with the median capacity of fragmented players being just about 1 m tonne, the transnationals will have to acquire capacities piecemeal and this route is fraught with a lot of uncertainties.
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| Supply |
The demand-supply situation is tightly balanced with the latter being marginally higher than the former.
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| Demand |
Housing sector acts as the principal growth driver for cement. However, in recent times, industrial and infrastructure sector have also emerged as demand drivers for cement.
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| Barriers to entry |
High capital costs and long gestation periods. Access to limestone reserves (principal raw material for the manufacture of cement) also acts as a significant entry barrier.
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| Bargaining power of suppliers |
Licensing of coal and limestone reserves, supply of power from the state grid and availability of railways for transport are all controlled by a single entity, which is the government. However, now days producers are relying more on captive power, but the shortage of coal and rising fuel prices remain a concern.
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| 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.
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| Competition |
Due to large number of players in the industry and very little brand differentiation to speak of, the competition is intense with players resorting to expanding reach and achieving pan India presence. |
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During FY07 production and consumption increased by 9% and 10% respectively. Further, it must be noted that owing to its locational advantage, India has significant potential to cater to the cement requirements of the Middle East and the South East Asian nations.
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Although the demand grew by only 10%, average industry cement realisations were higher by about 20% to 30% YoY on account of continued strong demand for the commodity. In effect, we believe that FY07 was one of the best years for the industry.
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With a view to make imports of cement competitive and moderate prices by increasing availability of cement, the Government of India abolished customs duty of 12.5%, countervailing duty (16%) and special additional customs duty (4%). However, imports do not pose a big threat since prices of cement in India are lower than those prevailing in the international markets. Moreover, the storage facilities on the Indian ports are inadequate for large-scale imports. The government has continued to provide a fillip to the infrastructure sector in the budget. While the budget emphasized a great deal on the completion of various irrigation projects, it raised the outlay for the national highway development programme.
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The industry is likely to maintain its growth momentum and continue growing at around 8% to 10% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main drivers of growth for the industry.
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With no major capacities coming onstream in the near term, the demand supply equilibrium is expected to continue and this will help prices to remain firm. However, capacity additions announced till date will add approximately 75 MT to the existing capacity, the bulk of which will come onstream from CY09 onwards. We believe this will start imposing downward pressure on cement prices in the country.
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Further, the possibility of interest rates heading north and the consequent impact on housing demand remains to be seen. While infrastructure spending has been a boon, there was a strong cushion from the steady growth of the construction sector (read housing). The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 75%-80% of the country’s cement. If this support wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the hike in prices of coal and petroleum products could impact cement companies margins.
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The budget measures such as cut in import duty from 12.5% to nil, removal of 16% countervailing duty, 4% additional customs duty on portland cement and differential excise duty are all aimed at reducing prices and increasing availability. Moreover, so far, they have been proved to be futile and in the future too, we believe that it is the market dynamics that will determine these variables.
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