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Cement: Transition progress

Jun 21, 2003

After witnessing a strong sign of consolidation in the recent past, the cement sector is back on the investor’s radar. While the Indian cement industry is still heavily fragmented, consolidation is a reality and it is likely to pick up speed going forward. Post the Grasim-L&T deal, three players now control nearly 45% of the total domestic cement capacity. In this article we take a look at the global scenario and India’s position in the same.

Globally India stands 2nd (next only to China) among the largest cement producers in the world. However, there is significant difference in the consumption appetite between India and other countries of the world. Per capita cement consumption in India is just 100 Kgs compared to 300 Kgs in Western Europe and 280 Kgs in US. Even Asian neighbours like China (420 Kg) and Japan (600 Kgs) have much higher consumption rates. Apart from this, the level of fragmentation is another distinction between India and other developed, or more mature markets.

Country Industry share of Top 10 Co.’s Major players Prices (US$)
US 80% Holderbank, Lafarge, Ciments Francais, Scancem and Blue Circle 65-70
Canada 90% Lafarge, Holderbank, Ciments Francais and CBR 135-150
Mexico 90% Cemex 110-120
India 66% Grasim, ACC, Gujarat Ambuja 50-60

In developed countries like the US (80% held by top 10 producers), UK and Germany there is significant consolidation of cement capacities. Having said that, we would also like to point out that while the level of consolidation is lower in India, it is fast catching up to global standards. The recent L&T-Grasim deal underlines that. From the pie charts below we get a fair idea about the extent to which Indian markets have consolidated in the last few years.

Consolidation brings about its own benefits for any industry and so is the case with the cement industry. Consolidation has brought about better understanding on pricing issues between the major players in the countries where it has succeeded. For example in US, cement prices rule at between US$ 65-70 per tonne. Compare this with the prices prevalent in the country and the difference is significant. In India cement price per tonne works out to an average of US$ 55 (FY03) per tonne. Clearly one can see the benefits of consolidation. In the Indian context, consolidation plays an even bigger role, as cement demand is growing at a healthy pace. Under these circumstances cement companies can benefit immensely from consolidation.

While there is still some time before the Indian cement industry catches up with its peers in more developed countries, it is slowly coming of age. With the industry set to grow between 8%-10% in the next 2-3 years we are likely to witness better times for the cement industry both in terms of demand as well as pricing. Changes are not just being seen in the domestic market. Indian cement companies are slowly gaining market share in international markets too. This is seen from the growing quantum of cement exports from the country.

As the Indian cement industry matures and consolidates, companies will become more profitable due to improved pricing scenario. Also, as India is still a long way away from its more developed counterparts in term of consumption, the long-term indications are positive. However, invest only in companies that are financially strong and those who have the wherewithal to tide through bad times.

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