Aug 13, 2003|
Cement: MNCís in a quandary
With the dismantling of the license-raj regime in the early nineties, the Indian cement industry finally got the chance to realize its full potential. Growing consistently at 9% over the past decade, the industry has emerged as the second largest producer of cement after China. But industry watchers feel that this encouraging growth is just a tip of the iceberg. The per capita consumption of around100 kgs compares poorly with the world average of 250 kgs, a pointer to the tremendous growth potential for the industry.
The foreign cement majors have realized this and have been eyeing India for quite some time now, ready to grab a pie of this lucrative market. The desperation of the foreign cement majors becomes all the more apparent when you consider that the growth in developed markets has already stagnated and most of the capacities in the other Asian markets such as the Philippines and Malaysia were already snapped up during the Asian crisis. But is it going to be easy for these MNCís to enter the Indian market which among other things boasts of a company that is the lowest cost producer of cement in the world and has been in an over supply situation for quite some time now. Letís find out.
There are primarily three ways in which a foreign player can enter the Indian market. These are:
Acquisition of a local company
Consolidation at the top and fragmentation at the bottom characterize the Indian cement industry. In other words, the top six players control almost 60% of the capacity, while the remaining 40% percent capacity is shared by nearly 40 players. Since cement is a high volume play, the MNCís would like to acquire huge capacities. The fragmented nature of the industry does not provide any such luxuries for the MNCís. Moreover, since the cement industry is in a growth phase at the moment, the valuations are going to be on the higher side for even those players who have not been the most efficient producers of cement in the past. Thus the expectations of the sellers and the price the buyers would be willing to pay are going to remain at odds for some more time to come.
Setting up Greenfield projects
Huge capacity additions by the domestic players over the past few years has created an over-supply situation in the industry. This has affected price realizations, which in turn has impacted the profitability of the companies. MNCís trying to set up new plants in India need to be wary of the over-supply scenario prevailing in the country. Fresh capacity additions by these players will not only aggravate the supply situation further but it will also work to their detriment as it will take them longer to achieve break even.
Export cement to India
Although the government has reduced import duty on cement, it will be neither a viable nor a feasible option for the MNCís to export cement to India. This is because the cement prices in India are lower than what is prevalent in other international markets. Moreover, inland freight forms a major chunk of the cost of cement in India. Thus, the MNCís who are trying to export cement to India will be saddled with huge freight cost, which will make their cement costlier than that of domestic players. Inadequate port infrastructure and lack of proper storage facilities on the Indian ports is also likely to thwart MNC attempts to export cement to India.
If the strategy of Lafarge, the largest cement company in the world is any indication, acquisition of small domestic players seems to be the preferred vehicle for the cement MNCís for entering the Indian markets. This strategy has two major advantages. First, it does not add to the existing capacity in the industry and thus does not depress prices further and second, the acquisition of the domestic players gives the MNCís valuable insights into the distribution networks of the acquired companies, an important factor in expanding market reach. Lafarge however has a small 3% market share of the Indian cement pie and with no major capacity up for sale, it will have to acquire capacity piecemeal and this option is paved with a lot of uncertainty. Therefore, is India a viable destination for cement MNCís? This is a question which only time will answer.
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