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Cement: What goes into it? - Views on News from Equitymaster
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  • Oct 4, 2006

    Cement: What goes into it?

    Cement, being a bulk and low value commodity, is a freight intensive industry and transporting cement over long distances can prove to be uneconomical. Proximity to limestone deposits contributes considerably to pushing down the costs of transportation of heavy limestone. In this scenario, the location of the cement plant becomes crucial. The plant also has to address the issue of power availability in the region. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. While deciding on the plant location, there is a trade-off between proximity to raw material sources and proximity to markets.

    Major input costs involved in cement manufacturing processes are

    • Raw material costs
    • Energy and Transportation costs

    Raw material costs: The raw material costs comprise of limestone, gypsum, granulated blast furnace slag (GBFS), and maintenance and stores requirement.

    Gypsum is used as a retarding agent and is naturally available in abundance in Rajasthan, Gujarat and Tamilnadu. The other raw material that is used is GBFS, a waste product of iron ore smelting. GBFS is obtained by granulation of slag obtained as a by-product during the manufacture of steel. It is used in the manufacture of Portland blast furnace slag cement. Limestone is the main raw material required for production of cement. About 1.5 tonnes of limestone is used in the manufacture of 1 tonne of clinker. Thus, for a 1 million tonne (MT) cement plant approximately 50 to 60 MT of limestone availability in the close vicinity is essential over the entire life span of the cement plant.

    Cement grade limestone is located only in certain areas in the country leading to establishment of cement plants in clusters. Limestone is available in large quantities in Rajasthan, Madhya Pradesh, Gujarat, Andhra Pradesh, Karnataka, Tamil Nadu, and parts of Bihar. Limestone availability coupled with transportation problems have led to pricing differentials across markets.

    Energy and Transportation costs: The cement industry is dependent on 3 major infrastructural sectors of the economy: coal, power and transport. The inputs from these 3 sectors account for roughly 50% of the cost of cement. Both the availability and the cost of these inputs have a vital bearing on the performance of the cement manufacturers.

    • Coal is key input required for cement production and accounts for 15-20% of the total operating cost. Around 25 tonnes of coal are used to make 100 tonnes of cement. The industry uses about 5% of coal produced in the country. Consumption of coal for production of cement has not increased proportionately with cement production because of the switch to the dry process, efficiency improvements in cement kilns and the increased use of fly ash produced in power plants and granulated slag produced in blast furnaces of steel plants in the production of cement.

    • Cement is a power intensive industry requiring on an average 110-120 units of power per tonne of cement produced. Significantly power accounts for 15-20% of the variable cost of cement manufacturing. Availability of stable and continuous power supply is of critical importance to the cement industry. Factories, particularly those in the South, have been experiencing erratic power supply. Cement manufacturing consumes power mainly for 3 purposes: raw material grinding, kiln rotation and clinker grinding. Each stage accounts for roughly 1/3rd of the total power consumption. However, with the increase in the frequency of power cuts and rising power tariffs, many cement companies are meeting 60-100% of their power requirement through captive facilities. The industry is trying to solve the power problem by setting up captive thermal power plants while diesel generator sets are being used as a stand by arrangement.

    • Cement is highly freight intensive in nature. Outward freight on cement is an important element in the operating cost of a cement plant. It accounts for around 1/3rd of the total variable costs. Every tonne of cement manufactured involves the transportation of 1.6 tonnes of limestone, 0.25 tonnes of coal, 0.05 tonnes of gypsum and 1 tonne of the finished product. Freight accounts for about 18% of the total cost. Cement companies use both road and rail transport to transport cement and to receive coal. Rail despatches amount for about 33% while roads carry the balance 66%. The balance 1% is accounted by Sea transportation.

    • The industry faces serious transportation constraints in terms of timely availability of rail wagons. This has forced manufacturers to move progressively larger quantities by road. To overcome this problem, the industry is relying on 'Own your Wagon' (OYW) and 'build operate lease transfer' (BOLT) schemes. It is clear that the companies that have procured own wagons and leased the same to the railways will be given priority in allotment of wagons. Companies like Grasim and ACC have already invested in the OYW scheme. Whereas Gujarat Ambuja has taken the advantage of its coast location and has constructed its own jetties at Kodinar, Surat and New Bombay. It uses these facilities and its own ships to move cement to markets in Gujarat and Mumbai. It enjoys a significant cost advantage by using this route. In his way Gujarat Ambuja has also overcome the problem of poor port facilities.


    Inspite of trying to insulate against energy resource crunch by setting up captive power plant, adopting cost effective technology like dry process and reducing dependence on government for infrastructure support, costs have increased. This is mainly because of rising coal, diesel costs, and raw material cost. Raw material costs have increased because of increase in royalty on limestone from Rs. 40 per tonne to Rs. 45 per tonne from October 14, 2004.

    This has highly impacted cost efficiencies of the cement manufacturing companies. Rising demand for cement has narrowed down the demand-supply mismatch. Though costs are increasing, cement manufacturers have been able to maintain margins, on account of rising demand resulting into better realisations. Cement production has grown at CAGR of 6% in past 5 years as against production and consumption growth of 8%. Cement industry is expected to grow at the rate of 8% in next 5 years. The Industry is expected to grow in line with the economic growth because of the strong co-relation with GDP and the increased activity in the construction sector.

    Over the long-term while we are positive on the growth prospects of the cement sector in India, we are uncomfortable with the current valuation levels that already seem to have factored in the medium term growth in the sector. Hence we would wait for an opportune time until some of the good quality sector companies become value buys. Currently however, caution is the buzzword!



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