Mar 16, 2002|
Cement: Short term jitters
The cement industry in India is slowly but steadily is reaching maturity, where a handful of manufacturers are gaining control of the manufacturing capacities. Currently, four players control nearly 50% of the national capacity. This could help the industry in the long run as there is likely to be a better understanding between major players on production and pricing issues.
Regional disparities in demand and supply dynamics are a prominent feature of the Indian cement industry. The leaders by market share in these regions are different. While the GACL-ACC combine is the leader in the northern region, the Grasim-L&T combine dominates the western markets. However, in the East, the Grasim-L&T combine and Lafarge command 20% market share each. In the southern region Grasim-L&T combine and India Cements control nearly 22% market share each.
Market share region wise
Though the long-term picture is looking promising, short-term trends are discouraging. The cement industry witnessed a mediocre first half in the current year with demand growing at 6.4% while the second half is witnessing oversupply coupled with demand continuing to lag behind. Oversupply is due to end of the year capacity additions by major players and due to increased production to meet volume targets.
Cement prices across the regions have remained depressed due to these reasons. Moreover, large volatility has been observed in regional cement prices, as the cement cartel attempts at playing the ‘invisible hand’. The industry is expected to post a growth of 7.5-8% in the current year. Increased infrastructure spending and growth in the housing sector are likely to be the key growth drivers for this industry in the long term.
With nearly 20% of the demand for cement coming from the infrastructure sector, the increased spending by the government in this sector is likely to boost cement demand. The government has undertaken the National Highway Development Program (NHDP), which includes two projects, the Golden Quadrilateral project and the North-South-East-West corridor projects. The cement requirement for these projects will be to the tune of 3-4 million tonnes in the next 4-5 years. With the Golden Quadrilateral project already nearing completion the commitment of the government seems to be clear. Low interest rates and a demand supply mismatch in the number of housing units are likely to fuel the growth of the housing sector, which accounts for nearly 60% of the cement demand. Estimates peg the industry demand growth at 8-9% for the next 2-3 years.
Though the cement industry has consolidated to a large extent, the cartel still remains fragile. The short-term objective of most cement manufacturers seems to be acquiring greater market share across the country, which could lead to attrition in operating margins. In order to increase the reach in different regions new capacities are being added which is distorting the regional demand and supply dynamics.
In spite of all the short term aberrations the fundamentals of the industry seem strong, the consolidation story has just begun, though there are only a few large acquisition targets left, the future could witness more strategic alliances and lot of smaller players selling out due to lack of economies of scale.
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