The Indian cement industry is the second largest in the world and had a total installed capacity of around 144 m tonnes in FY03. In order to understand the dynamics of the cement industry, it is necessary that we consider the demand supply situation across various regions in the country. This is so because cement is a product of high volumes and therefore transporting it over large distances can prove to be uneconomical. This makes it imperative for the plants to be located near markets. In some cases the plants also tend to be located near the limestone reserves (a major raw material for cement) from where the cement is transported to nearby states.
This leads to a scenario where the demand supply situation in one region can be vastly different from other region. However, in places where limestone reserves are high, there can be transport of cement from one region to the nearby region thus resulting in a situation where production in one region can affect the demand supply situation in the other region.
The Indian cement industry can be divided into five regions namely the North, South, West, East and the Central region. Let us study the demand supply situation in each region.
Northern region: The northern region mainly consists of the states of Punjab, Haryana, Delhi and Rajasthan. The region has close to 25 m tonnes of capacity and produced 24 m tonnes of cement in FY03, indicating a capacity utilisation of more than 95%. However the total demand in the state is close to 21m tonnes indicating that the surplus production of around 3 m tonnes is targeted towards states like Gujarat and MP. On account of the low demand supply gap, the prices have remained stable in this region. Also since Gujarat Ambuja and ACC dominate these markets, their alliance has lent some stability to prices. Going forward, the demand is likely to come from housing sector as these states have low industrial development. Prices are likely to remain stable unless there is a major capacity addition.
Western Region: The western region consists of the states of Maharashtra, Gujarat and Goa. The region has around 28 m tonnes of capacity and produced 19 m tonnes of cement in FY03 indicating a capacity utilisation of around 68%. This is the second biggest market in the country. High demand anticipation on account of rapid industrialisation and urbanisation has led to reckless capacity addition in this region and as a result supply has outstripped demand and thus it will take some time before the prices stabilise in this region. Gujarat Ambuja is the market leader in Gujarat whereas ACC, Gujarat Ambuja and L&T are the major players in the market of Maharashtra.
Southern Region: The Southern region consists of the states of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. This region is the largest market in the country with an installed capacity of around 44 m tonnes and production of around 33 m tonnes, indicating a capacity utilization of around 75%. The state of Andhra Pradesh is rich in limestone reserves and as a result produces surplus cement, which is transported to the states of Maharashtra and other nearby regions. On account of high demand supply mismatch the prices have remained subdued in this region. Going forward, price improvement is likely to be the major growth driver for cement companies in this region as demand growth is expected to be lower than the domestic average. Also since there is no major greenfield expansion in sight, this would further help in the price recovery. Although regional players like India cements and Madras cements are strong in these markets, national players like ACC and Grasim also have their presence in this region.
Eastern Region: The eastern region mainly consists of the states of Orissa, Bihar, Jharkhand, far Eastern states and West Bengal. The eastern region has a total capacity of 22 m tonnes and the region produced around 17 m tonnes of cement in FY03 indicating a capacity utilisation of around 77%. Most of the states like Orissa and West Bengal are cement deficit and service their requirements from the limestone rich Bilaspur belt. The demand has grown at around 9% in this region in the past decade and we expect the trend to continue. Lafarge, on the back of some acquisitions has emerged as a market leader in this region.
Central Region: The central region comprises of the states of UP and MP and has a total capacity of 18 m tonnes. The plants in this region worked at almost full capacity in FY03. Although Grasim and L&T have a significant presence in this region, smaller players largely dominate this region.
Due to the fragmented nature of the cement industry, it becomes imperative that we analyse the Indian cement market regionally. From the above regional segregation, we can safely assume that the companies in the Eastern, Northern and Central region are well placed to capitalise on cement demand growth. On the other hand, it may be a while before players in the southern and western regions will benefit from improved cement demand.