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: 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.
Conclusion
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!
For the quarter ended December 2020, JK CEMENT has posted a net profit of Rs 2 bn (up 73.2% YoY). Sales on the other hand came in at Rs 18 bn (up 25.3% YoY). Read on for a complete analysis of JK CEMENT's quarterly results.
For the quarter ended December 2020, SHREE CEMENT has posted a net profit of Rs 6 bn (up 102.0% YoY). Sales on the other hand came in at Rs 33 bn (up 16.2% YoY). Read on for a complete analysis of SHREE CEMENT's quarterly results.
Here's an analysis of the annual report of JK CEMENT for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of JK CEMENT. Also includes updates on the valuation of JK CEMENT.
Here's an analysis of the annual report of ACC for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of ACC . Also includes updates on the valuation of ACC .
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