According to newspaper reports, Associated Cement Companies (ACC) is planning to set up a 1 m tonnes per annum cement plant in Karnataka. The company is likely to go ahead with the project only if Jindal Vijaynagar Steel Ltd. (JVSL) agrees to supply the new unit with slag, a waste produced in the manufacture of steel, which will be used as raw material for the manufacture of cement.
ACC, India's second largest cement producer, has an aggregate cement capacity of 1.3 mn tpa. It is implementing an expansion plan under which the cement capacity is expected to rise to 15 m tonnes by 2001.
The primary raw material used in the manufacture of cement is limestone. As this raw material is to be found only in select pockets, it usually adds to the transportation costs for the cement company, which has to then locate the plant either near the raw material site or consumption centres. Moreover, cement manufacturers have to enter into agreements/contracts with limestone suppliers, which could lock the quantity and/or price of the limestone supplies. This limits the flexibility in terms of cost control and pricing. More importantly, there is uncertainity regarding the regularity of the supply, especially if the plant is far away from the limestone mine. This creates the need to create an inventory, which uses working capital and consequently increases the cost of production.
The advantages of using slag over limestone are apparent. The slag is received from the steel plant, and therefore as long as steel is being manufactured, there will be slag. Moreover, as both the plants are more likely to be in close vicinity of each other, there will be little cost incurred on transportation of slag. More importantly, the quality of cement is the same as when limestone is used in the manufacturing process.
There is a mutually beneficial relationship between the steel and cement manufacturers. This is so because the steel manufacturer also benefits in terms of being paid for the waste that is produced, instead of bearing the costs of its disposal. Therefore it is in the interest of both the parties to build a long-term relationship.
Also, If ACC were to be successful in setting up the cement plant, it would have a bigger presence in South Indian cement markets, where demand for cement is growing at a faster rate than in the other areas of the country.
However, there is a downside to the use of slag as raw material. The technology for manufacture of cement using slag is yet to be tested on a large scale in India. Moreover the cement manufacturer, ACC, will become overly dependent on the steel manufacturer, JVSL, for its raw material supplies. This could weaken ACC's bargaining power vis a vis JVSL, leading to lesser control on raw material costs. Apart from this, there is a possibility of a disruption of production in the steel plant, which could adversely affect the steel plant.
The stock has been rated as a 'BUY' on account of the strong recovery in demand and consequently the prices of cement. Moreover, the company's initiatives in controlling costs and increasing efficiency is expected to drive earnings growth.