• NOVEMBER 2, 2002

Cement: A regional story

The cement industry is going through a phase of high volumes and poor realisations. On one hand, oversupply has led to poor realisations while on the other cement demand has been on the rise due to healthy demand from the housing and infrastructure sectors. Inspite of national average realisations falling, prices have been strong in some regions in comparison with others.

So why is it that certain regions of the country have better prices compared to the others? Cement prices are influenced by factors like demand supply mismatch and extent of competition. Though prices have been weak all over the country due to oversupply, prices in the north and east are comparatively better than those in west, south and central India.

Consolidation in the eastern region is higher on a comparative basis and this has positively impacted the realisations in this region. ACC-Gujarat Ambuja (GACL) combine is the dominant player in this region. Lafarge and the L&T- Grasim combine are the other major cement producers in this region. The strategic alliance between GACL and ACC and Grasim and L&T has led to a better volume and price understanding between the various players in this region. Apart from consolidation a favourable demand supply position is also currently a feature of the region.

FY02 Capacity
(m tonnes)
(m tonnes)
South 44.8 29.9
North 25.2 21.9
West 22.3 17.2
East 21.0 16.7

On the other hand, in the northern region the demand supply mismatch is very low. The capacity in this region is nearly 25 m tonnes while demand is nearly 22 m tonnes. Also the dominant player in this region is the ACC- GACL combine and is in a good position to dictate prices. This has led to firmer cement prices in this region.

In the south, demand supply mismatch is large. Capacity stands at 45 m tonnes wile the demand is just 30 m tonnes. Also the level of consolidation is low in this region. Both these factors have led to a low price realisation in this region. The situation is similar in the western region. Cement capacity stood at 22 m tonnes while demand was only 17 m tonnes. Also high fragmentation in the cement market in this region has led to a break down in the cartel formed by the major players.

Cement prices are a factor of demand and supply, but one factor that can help firm up prices is the extent of consolidation in the market. Cement markets in western countries are highly consolidated (2-3 players control nearly 80-90% market share) and this has led to better understanding on production and pricing issues. Higher consolidation will also help avoid the occurrence of an adverse demand supply mismatch scenario. In the Indian context a high level of fragmentation (40-45%) in the domestic market has meant intense competition among producers. Successive cartels have fallen due to undercutting by smaller cement producers.

India has a surplus cement capacity to the extent of nearly 38 m tonnes. Capacity additions have been a regular feature in the last decade, as the government gave adequate sales tax incentives to set up plants with a large capacity. The current decade however may see a different trend where capacity addition will be at a lower pace due to lack of incentives. While consolidation in the cement industry will crawl along, the demand supply gap is expected to close at a faster clip, which brings relief to producers.

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