The cement industry in India has greatly benefited from the recent consolidation. With the high profile acquisitions leading to change in managements, investors seem to be quite optimistic on the sector. However, a look at the industry region-wise could highlight a more sober picture.
With regional demand-supply mismatches, different regions in the country command different prices. Market shares for major players are different across regions; also the demand drivers in these regions are not harmonious. This makes it imperative that the cement market be viewed regionally.
The total demand for cement in the country for 2000-2001 was 90 m tonnes. Compared to this the cement capacity in the country stood at nearly 107 m tonnes. The total production of cement in the same year was 93.4 m tonnes; the surplus of 3.4 m tonnes was exported. Though the Indian cement industry is in the process of consolidation, nearly 50% of the industry is still fragmented. Due to this reason it is important that the cement market be viewed region wise.
The cement market can be divided in to Western, Eastern, Southern and the Northern regions. The northern region comprises of big markets like U.P, Punjab, Rajasthan and Delhi, while eastern region comprises of West Bengal, Bihar and Orissa. Kerala, Tamilnadu, Karnataka and Andhra pradesh are included in the southern region, while Maharashtra, Gujarat and M.P constitute the western markets.
In the Western region, Maharashtra and Gujarat are the main consumers of cement with Mumbai as the largest and the most lucrative market with a demand of 3.5 m tonnes. The total consumption in this region was about 24.6 m tonnes as compared to a capacity of 34.6 m tonnes. The demand drivers for this region are mainly industrial construction and urban infrastructure.
There is a high degree of consolidation in this region with over 60% of the market share being controlled by just two groups, the GACL-ACC group and the Grasim- L&T group. The Grasim-L&T combine commands an estimated 38% market share in this region. This level of consolidation helps in better realizations from these markets. Prices are likely to hold steady with major producers regulating production.
In the Northern region, Delhi and Punjab are the largest consumers of cement. The demand in this region during the last year was 28.1 m tonnes whereas the capacity was 22.5 m tonnes. The demand here is driven by rural housing and government funded agriculture related infrastructure.
This region is also highly consolidated compared to the other regions, with GACL-ACC and Grasim-L&T combines controlling an estimated 52% market share. GACL & ACC control an estimated 36% of the market share in this region. Though consolidation has helped in stabilizing the cement prices in this region, the balance established here is very delicate and unless there is further consolidation in the future the cartel may just not hold, as there is pressure from smaller players who are likely to under-cut prices.
In the Southern region, the market is relatively fragmented with Tamilnadu, Kerala and Karnataka as the major consumers of cement. Demand in the states of Karnataka, Tamilnadu and Andhra pradesh is derived from industrial and urban infrastructure construction. Housing construction projects drive demand in Kerala. The demand for this region stood at 23.8 m tonnes as compared to a supply of 31.4 m tonnes.
India cements and Grasim-L&T are the leaders in this region with an estimated 22% and 21% market share respectively. Pricing in the south will improve with better understanding between Grasim and L&T, but for the cartel to hold further consolidation is needed. With the GACL-ACC combine and Madras Cements expanding capacities, the pressure for consolidation could increase.
In the Eastern region, Orissa and Bihar are the major consumers of cement with industrial infrastructure as the major contributor to demand. The demand in this region was close to 14 m tonnes, the cement capacity in this region stood at 20 m tonnes.
This region is also relatively fragmented with 3 players controlling close to 67% of the market share. GACL-ACC is the largest player in this region with an estimated 24% market share followed by Lafarge with an estimated 23% market share. The understanding between the major players in this region has been poor in the past, which has led to weak cement prices in this region. Lafarge has compromised on margins in order to gain market share. Though more recently the situation has improved with Lafarge limiting production, a better understanding is required in order to obtain higher realizations in the future.
The cement industry will benefit only as long as there is further consolidation at the regional level. The northern and the western regions are better consolidated than the rest, giving better realizations per bag for the major players. Having said that, the premium pricing does not hold for long, as cement from other regions finds its way into these markets. It seems to be more likely that, not before long, consolidation will catch up regionally.