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Cement: Consolidation gains

Feb 7, 2002

The cement industry is in the process of consolidation; the top five players now account for nearly 60% of the capacity as compared to 33% just a few years ago. Even though the major players are in a better position due to consolidation, they are still a long way from global trends where just 2 or 3 players control 85% of the capacity. Consolidation coupled with slower growth in capacity additions will finally put an end to a scenario where growth in supply outstripped demand growth. The Indian cement sector has a capacity of about 129 million tonnes and is the largest after China (capacity of 550 million tonnes). The per capita consumption of cement in India is around 90 kgs as compared to a world average of 256 kgs and an Asian average of 200 kgs, making India a very lucrative market.

However, despite this apparently attractive market, cement realisations over the past 5 years (until December 2000) have been subdued. This was mainly due to the large-scale capacity additions during the three-year period, 1994-1997. What triggered this large-scale capacity expansion was the hope that the initiation of economic reforms would greatly increase spend on infrastructure and housing, resulting in a surge in demand. As the spend did not materialize, the industry was left with excess capacity, creating a situation where the supply continued to grow, even as demand growth was below expectations. The situation was made worse by the fact that the industry was very fragmented, resulting in intense price competition. More recently large capacities have been added to avoid the December 2001 deadline on sales tax exemption.

Having said that, the scenario going forward is likely to improve due to the following reasons. First, there has been a 25% growth in housing loans disbursals (FY02) compared to the previous year. This augurs well for the industry as nearly 60% of cement demand is from the construction industry. The future of this industry is quite bright. For instance, if we consider the housing sector alone the present shortage of houses is about 30 million units - 10 million in the urban and rest in the rural areas. This shortage implies tremendous business opportunity for players in the construction industry.

Second, infrastructure spending in the country has got an immense boost due to the aggressive implementation of the Golden Quadrilateral, North - South and the East - West corridor projects by the National Highway Authority of India (NHAI). These projects involve laying nearly 13,000 kilometers (kms) of highways at a planned expenditure of Rs 540 bn.

With 25% concretization and an average consumption of around 2,700 tonnes per kilometer of highway, the estimated demand for cement works out to be around 11 million tonnes for the Golden Quadrilateral project and 5 million tonnes for the North - South and the East - West corridor projects. The two projects are scheduled to be completed by 2004 and 2007 respectively and are expected to account for 2-3% of the demand growth in the next 4-5 years.

With the construction of highways, developmental activity along these roads is bound to pick up. This could further fuel the demand for cement in the coming years. Apart from these projects the government has already initiated the rural roads project for which Rs 5 bn has already been allocated; cement demand from this project is also expected to be considerable.

Third, the reconstruction work in Gujarat will require nearly 2-3 million tonnes of cement in the next 2 years. Given these developments, coupled with the anticipated pick up in the domestic economy in FY03, the cement demand is expected to grow at over 8% per annum in the near future.

On the supply side too the situation looks to be very promising. After the rush to set up capacities to meet the December 2001 deadline, capacity additions over the next two years will be limited to 2 to 3 million tonnes per annum. Moreover, as of now, no large green field capacity is being planned by any of the domestic majors.

Even as capacity additions slow down, the Indian cement industry has become more consolidated. This has resulted in a scenario where price competition has reduced dramatically. Indeed, since December 2000, cement companies have witnessed a sharp rise in realisation per bag. Going forward, this trend is likely to persist, notwithstanding the short-term volatility.

Over the next two years, the cement sector is likely to witness a scenario where demand growth outstrips the growth in supply. By some estimates, the sector should see a balance in demand and supply by 2004. Such a scenario will benefit companies in terms of a better pricing environment. Such a development would surely bring cheer to the cement sector, which is probably one of the most competitive industries in the country.

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