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Cement Sector Analysis Report 

[Key Points | Financial Year '19 | Prospects | Sector Do's and dont's]

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  • With ~509 million tonnes per year (mtpa) of cement production capacity as of March 2019, India is the second largest cement producer in the world and accounts for over 8% of the global installed capacity.
  • As of July 2019, the production of cement stood at 28.1 million tonnes. The cement production capacity is estimated to touch 550 MT by 2020. Of the total capacity, 98% lies with the private sector and the rest with the public sector. The top 20 companies account for around 70% of the total production.
  • FDI inflow in industry related to manufacturing of Cement & Gypsum products reached US$ 5.3 billion between April 2000 and June 2019. The Government of India is strongly focused on infrastructure development to boost economic growth and is aiming for 100 smart cities.
  • The government also intends to expand the capacity of the railways and the facilities for handling and storage to ease the transportation of cement and reduce transportation costs. The demand of cement industry is expected to achieve 550-600 million tonnes per annum constantly by 2025 because of the expanding requests of different divisions i.e. housing, commercial construction and industrial construction.
  • India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major initiatives such as development of 98 smart cities are expected to provide a major boost to the sector.

How to Research the Cement Sector (Key Points)

  • Supply
  • The demand-supply situation is highly skewed with the latter being significantly higher.
  • Demand
  • 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.
  • Competition
  • 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.

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Financial Year '19

  • The Indian cement industry witnessed a year of favorable demand scenario, achieving double-digit volume growth, last seen in FY10. With healthy volume off-take and comparatively lesser new capacity addition of 12 mtpa during FY19, capacity utilization for the industry improved to 71%, about 5% higher than the previous year.
  • Cement production grew by 13.3% to 337.3 million tonne in FY19 compared with 6.3% growth in FY18. This has been the fastest growth in cement production recorded in one single year over the last decade. Production grew at a CAGR of 5.6% from 230 MT in FY12 to 337.3 MT in FY19.
  • India's exports of cement, clinker and asbestos cement increased at CAGR of 10.5% between FY12-FY20 (April-July 2019) to reach US$ 177.9 million.
  • During the same period imports of cement, clinker and asbestos cement increased at a CAGR of 8% to US$ 57.6 million in FY20.
  • To enhance the source of capital for infrastructure financing, Credit Guarantee Enhancement Corporation for which regulations have been notified by the RBI, will be set up in 2019-20.
  • FDI inflow in industry related to manufacturing of Cement & Gypsum products reached US$ 5.3 billion between April 2000 and June 2019.
  • The growth in production volume during FY19 was higher on the back of increased demand for cement from infrastructure ad low-cost/rural/affordable housing segment.

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Prospects:

  • Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors.
  • Higher government spending on infrastructure and housing, and rising per capita incomes will be key growth drivers for the cement industry. There have also been positive moves on the policy front, in areas related to ease of doing business, promoting start-ups, rationalizing the tax structure and administration, and opening up more areas for foreign investment through the automatic route. The government is substantially stepping up infrastructure spending.
  • Expecting such developments in the country and aided by suitable government foreign policies, several foreign players such as Lafarge-Holcim, Heidelberg Cement, and Vicat have invested in the country in the recent past. A significant factor which aids the growth of this sector is the ready availability of the raw materials for making cement, such as limestone and coal.
  • As per CRISIL, cement demand growth will witness a mid-cycle slowdown to 5-5.5% this fiscal, down sharply from 12% in fiscal 2019. Growth would be even lower compared with fiscal 2018, when it had printed 9%.
  • From a long-term point of view, overall pick-up observed in the infrastructure spending by the Government and downward trend in the interest rates is expected to revive the demand across sectors. The 7th Pay Commission is expected to aid in housing demand. Government thrust on affordable housing for realizing its vision of “Housing for All” by 2022 and Smart City program should also help in demand growth for cement. The rate of new capacity additions has also slowed down considerably. Therefore, the outlook for the cement sector looks better.
  • The cement industry is dependent on natural resources and is highly energy intensive. Natural resources like limestone, coal and minerals are essential to produce cement. The industry needs to ensure the continuous supply of these materials at an optimum cost and quality, however due to the depletion of reserves, this is becoming challenging. Volatility in the price of coal is also an area of concern for the industry.

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Related Links for Cement Sector
Quarterly Results | Sector Quote | Over The Years

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