A follow-on good harvest will give a further shot to the building of pucca houses in rural and semi-urban centres.
Indian cement manufacturers, under cost and over capacity pressure, have reasons to celebrate the Meteorological Department’s initial forecast of a normal monsoon this year which should allow the country to once again harvest bumper food and commercial crops.
As producers of the bonding material are now experiencing better demand in the countryside in the wake of an all-time foodgrain production of 235.88 million tonnes in the 2010-11 crop year, a follow on good harvest will give a further shot to the building of pucca houses in rural and semi-urban centres.
At the same time, the UPA government’s redemption of pledge to build 10 million houses under the Rajiv Awas Yojana for the slum population will generate incremental demand for cement. The housing sector accounts for nearly half the cement use here and therefore, cement producers will want the government to initiate action to clear the backlog of a conservatively estimated 25 million houses.
At this point, nearly one-third of the country is urbanised. While this is less than the world average of over 40 per cent, urbanisation is to spread fast here, thanks to wealth generated in the farm sector and industries being set up in faraway places. No surprise then that cement companies have gone high octane in pushing sales in smaller cities and towns. In building construction, particularly residential structures, steel cement use ratio is heavily loaded in favour of bonding material.
As against steel cement use pattern of 1:1 in developed countries it is 1:3 in India. We, therefore, get to see steel men like C S Verma, Sajjan Jindal and the Ruias actively campaigning for lifting the share of steel in construction work on grounds of enhanced life of structures, reduced construction time and better aesthetics.
They are leading SAIL, JSW and Essar to promote use of steel in house construction and other applications beyond urban centres into remote rural areas. The SAIL thrust on prefabricated structures has the potential to change steel cement use ratio in house building.
That the cement industry is not overly concerned about any major replacement of bonding material by steel is to be seen in the large cement capacity being created, even while a good portion of capacity already installed remains unused.
According to ACC in which Switzerland headquartered Holcim owns 48.21 per cent, like in the past five years, the industry’s compound annual growth in the next quinquennium will be 10 per cent.
Some rating agencies, however, are of the view that while the industry here has the potential to grow at a higher CAGR of 12 per cent, the ground level reality of supply being more than demand putting pressure on margins may impact new capacity building.
The heat of intensifying competition is putting all groups under pressure. This will be more acutely felt in the south, which in spite of being a surplus region, will see bulk of the country’s new cement capacity creation. ACC points out, demand-supply balance in other regions will, however, either “improve or remain status quo.” In a report ‘Cementing India,’ Ernst & Young anticipates capacity addition of 54 million tonnes in the two years to fiscal 2014.
The report further says though capacity utilisation will stay around 80 per cent this fiscal, “financial year 2013 onwards, demand will outstrip supply and this higher demand is expected to continue in medium to long term.”
Like many other agencies, Ernst & Young believes that cement demand will rise on the back of the country committing an investment of $1 trillion in infrastructure development during the 12th plan period (2012-17).
As India engages in building infrastructure rapidly, its per capita consumption of cement at 156 kg should keep on coming closer to the global average of 396 kg. Besides infrastructure and house building, massive investments planned for industries like power and steel should trigger good demand for cement.
Cement industry here has seen some major consolidation of capacity heralded by steel, textile and engineering groups wisely exiting non-core cement business. It was only to be expected that world majors like LaFarge and Holcim will go on increasing their India profile by building new plants as also through the inorganic route. Last year, when Lafarge chairman and CEO Bruno Lafont came visiting India, he saw “consolidation happening here in the mid term.”
Lafarge, which set its foot here in 1999 with the purchase of Tata Steel’s cement business followed by acquisition of Raymond’s cement mill, would continue to be open to seizing consolidation and greenfield plant building opportunities.
Industry restructuring will happen through a mix of expansion of existing units, building of new plants and acquisitions.
The way the industry is expected to perform in the near term should create new opportunities for consolidation with groups with capacity of up to 5 million tonnes becoming natural takeover targets.
Cement is a capital intensive industry and low profits like now make it difficult to service loans. But why only smaller enterprises, as the experience of ACC, Ambuja and L&T Cement would show even big groups may offer themselves for buy out if right price is to be had.
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