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Cement: A regional story!

Dec 28, 2006

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. While deciding on the plant location, there is a trade-off between proximity to raw material sources and proximity to markets. This leads to a scenario where the demand supply situation in one region can be vastly different from other region. Cement has been largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. The regional disparity also affects realisations of companies in that region. Historically, southern region has faced demand supply glut leading to low realisations. On the other hand, companies in the Western region fetch highest realisations in the industry on account of demand exceeding supply.

From the table below it is clear that there is oversupply in the northern and the southern region while demand-exceeded supply in the western region.

Region Production Consumption
Northern 19.5 29.7 8.8% 16.8 27.1 10.0%
Southern 27.4 44.9 10.4% 24.1 39.0 10.1%
Central 15.6 22.3 7.4% 16.1 20.6 5.1%
Western 15.8 24.9 9.5% 19.5 25.9 5.8%
Eastern 15.2 20.1 5.7% 13.7 22.7 10.6%
Source: CMA

While comparing FY01 regional demand supply situation with that of FY06, we get to know that growth in the southern region was faster compared to other regions. The production and consumption in the southern region grew by almost 10% CAGR during FY01 to FY06 on account of booming end user industries like housing and construction and continued easy availability of raw materials. Though the demand supply mismatch in the region has narrowed down, once the new planned capacities become operational, the region will once again face excess supply situation, in turn driving down the prices.

The consumption in the Northern and the Eastern region has also increased at a CAGR of 10% during the period under consideration. But the production in the Northern region was higher at approximately 9% compared to the 6% (CAGR FY01 to FY06) that was achieved in the Eastern region. With a boom in infrastructure, the cement consumption increased at a faster pace compared to production and now the Eastern region faces a supply shortage. To meet the growing demand, companies have lined up capacity expansion plans. ACC plans to set up RMC (Ready mix concrete) units in the Eastern region, Lafarge, the international cement major that has made a foray into Indian cement markets, has a presence only in the Eastern region and plans to further increase market share by setting up a greenfield project. The region will continue to witness strong demand, given the large number of steel and power plants being planned. These industries being labor and infrastructure intensive, are likely to consume a good quantity of cement going forward. Thus with commencement of new plants and higher capacity utilisation, demand supply mismatch is expected to reduce. While the Northern region continues to face excess supply situation, the buoyant construction sector is expected drive the demand in this region. In the Northern region, demand growth will remain strong though it might not be as strong as in the East or South.

In the past, demand outstripped supply in the Central and Western regions. But over a period of time, the demand supply gap has narrowed down, in fact Central region now faces excess supply situation. This is on account of low consumption growth (CAGR of approximately 5% from FY 01 to FY06) vis--vis production growth (CAGR of approximately 7% from FY01 to FY06). In case of Western region, production grew at CAGR of approximately 10% during FY 01 to FY06 while consumption growth was around 6% for the same period. Going by the projects announced, limited capacity addition is expected in the western region in the next few years, and therefore prices should remain firm.

Demand supply trends in the cement industry are typically region-specific. Proximity to raw material and end markets drives the all-important decision of zeroing in on a suitable location for a plant. From the above regional segregation, it can be inferred that the companies in the Eastern and Western region will witness better margins. However, in the long run, the company, which is able to control its cost better and extract the maximum out of its plants and equipment, is most likely to emerge as a winner.

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