The Indian cement industry is the 2nd largest market after China, accounting for about 8% of the total global production. It had a total cement manufacturing capacity of 375-390 million tonnes (MT) as of financial year ended 2014-15. Cement is a cyclical commodity with a high correlation with GDP. The housing sector is the biggest demand driver of cement, accounting for about two-thirds of the total consumption. The other major consumers of cement include infrastructure, commercial construction and industrial construction.
The cement industry capacity doubled in the last decade, with about 70 million tonnes added in the last three years alone. Though India has witnessed sustained growth in cement consumption since 2001, the growth has slowed down in the last 3-4 years. This has been on account of a slump in housing, infrastructure and commercial sector. The gap in the pace between capacity additions and actual demand has led to a excess capacity situation in the industry, resulting in sub-optimal utilisation rates.
Moreover, the per capita consumption of cement in India still remains substantially low at about 195 kg when compared with the world average which stands at about 520 kg. This underlines the tremendous scope for growth in the Indian cement industry in the long term.
Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. 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. The Southern region of India has the highest installed capacity, accounting for about one-third of the country's total installed cement capacity.
The demand-supply situation is highly skewed with the latter being significantly higher.
Housing sector acts as the principal growth driver for cement. However, industrial and infrastructure sectors have also emerged as demand drivers.
Barriers to entry
High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier.
Bargaining power of suppliers
Licensing of coal and limestone reserves, supply of power from the state grid, etc. are all controlled by a single entity, which is the government. However, many producers are relying more on captive power.
Bargaining power of customers
Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. Cement is sold in two segments – trade and non-trade. Trade cement is the one sold to the dealers. Non-trade cement is sold directly to the consumers, mainly institutional buyers. Trade cement sells higher compared to non-trade. As such, companies that have a strong distribution network and retail presence tend to have better cement realisations.
Intense competition with players expanding reach and achieving pan India presence. The industry is a lot more consolidated than a couple of decades ago with a few large players controlling substantial market share.
During the financial year 2014-15 (FY15), India's cement industry grew by about 5.6% year-on-year (YoY) as compared to 3.1% YoY growth in the financial year 2013-14 (FY14). The growth was supported by pre-election spending and delayed monsoon in the first half of the fiscal. During the second half, the demand was impacted by low government spending and less demand from real estate and construction projects, and slow revival in infrastructure spending. The cement industry capacity utilisation rate stood at around 71%.
Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The Modi government's thrust on housing and infrastructure development should augur well for cement demand. The crash in the global crude oil prices and other commodities should help cement companies to reign over cost pressures and improve profitability of the sector.
While medium term challenges remain in the form of excess capacity, slowdown in rural demand and slow offtake of infrastructure projects, the long term drivers for cement demand remain intact. The demand-supply mismatch is expected to reduce in the next three years as the rate of new capacity additions slows down and growth picks up pace. Higher government spending on infrastructure and housing, and rising per capita incomes will be key growth drivers for the cement industry.
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