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Cement: Cartel on shaky ground

Apr 4, 2002

The cement industry is currently plagued by over supply, which has lead to depressed prices, the only saving grace being the constant demand for cement. This demand has ensured that the prices of cement do not fall further. The current year has been good for some cement producers while it has been not so good for others. While Gujarat Ambuja and ACC have performed well on the cement dispatch front, Grasim and L&T have lagged behind considerably.

Region wise YoY growth in consumption (%)
Region 1QFY02 2QFY02 3QFY02 Jan-Feb FY02
North 3.9 6.4 19.2 17.5
South -5.0 9.9 12.8 16.7
East 10.1 8.6 12.2 36.4
West 2.0 -3.3 5.4 18.3

Gujarat Ambuja (GACL) and ACC seem to have followed the same strategy, anticipating a demand growth from the different regions of the country the ACC-GACL combine has been adding new capacities in order to be in a better position to meet the demand. GACL has recently commissioned a 2 m tonne cement plant in Chandrapur in Maharashtra, which is undergoing test runs, while ACC has commissioned a 2.6 m tonne cement plant in Wadi in Karnataka. Grasim and L&T seem to be catching up with GACL and ACC. These two have initiated their own capacity addition exercises. Grasim has recently set up a 1 m tonne grinding unit in Punjab while L&T has set up a 1 m tonne plant in Durgapur.

Quarterly % volume growth figures
1QFY02 2QFY02 3QFY02 Jan-Feb FY02
L&T 6.9 7.1 3.3 10.3
GACL 3.0 14.7 18.7 20.7
ACC 4.9 16.9 20.2 20.0
Grasim -2.8 3.0 3.3 4.0
Industry 2.3 6.9 11.5 13.7

Though the increase in capacity has helped most of the large cement producers to increase dispatches, capacity utilisation has fallen. Higher capacity has also pressured realisations. The strategy seems to be clear, the major players intend to increase market share in the different regions of the country. This has lead to the progressive disintegration of the cartel across the country. Higher dispatches across regions indicate that there is an aggressive push to meet volume targets. While GACL and ACC have been able to consistently manage a healthy cement dispatch growth rate, Grasim and L&T have been able to improve their dispatch figures in the second half of the current year by ramping up capacities through de-bottlenecking and new capacity additions.

Higher dispatch figures for GACL and ACC indicate another aspect of the consolidated cement industry. GACL and ACC seem to be leveraging very well on each otherís strengths. ACC has benefited from GACLís expertise in efficient running of cement plants while GACL has benefited from ACCís large reach within the Indian market. Though the dispatch figures of L&T and Grasim have improved in the second half of the current year, it seems more because of their respective capacity ramp up rather than their alliance.

The cartel that was formed as a result of the large-scale consolidation has not held its ground. Consolidation in the Indian markets is still at a nascent stage with nearly 50% of the cement capacity still in the hands of the small cement producers compared to 80-85% consolidation internationally. Though the Indian cement industry has made progress on the consolidation front, it has still a long way to go before it can achieve a sustainable pricing power.


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