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Cement Sector - Industry Inputs
It 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 cement.
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. This has created pockets of cement production called clusters.
The skewed distribution of capacities coupled with transportation bottlenecks has created pockets of surplus and deficit in the country. This has led to pricing differentials across markets. Each unit has its mix of core, natural or distant markets depending on price attractiveness of a market and the freight cost involved in servicing that market. Madhya Pradesh, Rajasthan and Andhra Pradesh are the main cement surplus states while Uttar Pradesh, West Bengal and Kerala are the main cement deficit states.
Around 25 tonnes of coal are used to make 100 tonnes of cement. Coal forms about 20% of the total operating cost. The industry uses about 5% of coal produced in the country. Until recently, private ownership of coal mines was not permitted in India and all purchases had to be made from government-owned coal mines.
The government and Cement Manufacturers Association (CMA) make allocation of coal. The quantities are fixed after making assessments of likely production and also based on past performance of the unit concerned. Units at a greater distance suffer because of high transport costs and (in case of some units) delays in receiving coal because of additional transhipment time (loss in transferring coal from broad gauge to meter gauge wagons).
Coal is abundantly available primarily in eastern Madhya Pradesh, Orissa, Bihar, north Andhra Pradesh and eastern Maharashtra. The coal fields are inefficient resulting in delays in coal availability. Since the quality of coal is poor (high ash content) and inconsistent, this leads to problems of quality control for cement plants.
Sometimes, although coal is available, rail transport is not, which forces cement manufacturers to transport coal using trucks, or purchase coal from neighbouring consumers who have not used their coal allocation. To overcome these problems, coastal based companies like Gujarat Ambuja import coal. However lack of adequate port facilities hinders large scale import of coal into India.
In February 1996, the mining sector was partially liberalised and cement companies were allowed to set up captive coal mines. Until now, only ACC has acquired a coal block, Lohar in Maharashtra for captive mining.
Coal benefication is developing as a long term solution for the industry given the continuos deterioration in coal quality coupled with inadequate availability. Benefication involves setting up of washeries with which the ash content of the coal can be reduced to the required level increasing the overall efficiency of the kilns.
Cement industry is power intensive and about 120 kwh of power is required to produce one tonne of cement. The consumption is lower at around 90-100 kwh in new and more efficient units like Gujarat Ambuja. Power accounts for 16% of total operating costs. Availability of stable and continuous power supply is of critical importance to the cement industry. Factories, particularly those in the South, have been experiencing erratic power supply. Also power costs are high in India and growing at 10% annually. The industry is trying to insulate itself against this by setting up captive thermal power plants while diesel generator sets are being used as a stand by arrangement.
Cement is highly freight intensive in nature. Every tonne of cement manufactured involves the transportation of 1.6 tonnes of limestone, 0.25 tonnes of coal, 0.05 tonnes of gypsum and 1 tonne of the finished product. Freight accounts for about 18% of the total cost. The industry faces serious transportation constraints in terms of timely availability of rail wagons. This has forced manufacturers to move progressively larger quantities by road. Inspite of serious shortage of wagons, the planned expenditure on this has been slashed by more than 40% under resource constraints. The outlay has also been reduced on gauge conversion - thus limiting carrying capacity and turnaround time of wagons.
To overcome its resource crunch, the Railways is relying on 'Own your Wagon' (OYW) and 'build operate lease transfer' (BOLT) schemes. It is clear that the companies that have procured own wagons and leased the same to the railways will be given priority in allotment of wagons. Companies like Grasim and ACC have already invested in the OYW scheme.
Gujarat Ambuja pioneered the concept of transportation by sea. It has taken the advantage of its coast location and has constructed its own jetties at Kodinar, Surat and New Bombay and has insulated itself from otherwise poor port facilities. It uses these facilities and its own ships to move cement to markets in Gujarat and Mumbai. It enjoys a significant cost advantage by using this route.
The key infrastructure support for cement manufacturing which include power, coal and railways accounting for 55-60% of the cost of manufacturing and selling cement are controlled by the government. Not only the cost of these services provided by the government has risen more than inflation (as measured by the wholesale price index in the 1990's) but the quality of these services leaves a lot to be desired.
For example the reliability of power from State Electricity Boards (SEBs) is poor in major cement producing states. States like Madhya Pradesh, Andhra Pradesh, Rajasthan and Karnataka have power cuts of 35-40% for more than 6-8 months of the year. Thus companies having low dependence on government for infrastructure support have a competitive advantage.
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