The Indian cement industry is the second largest cement producer in the world after China with a production capacity of nearly 420 million tonnes. It accounts for 6.9% of the world’s cement output. India’s cement production capacity is expected to reach 550 million tonnes by 2025. The industry provides employment to more than a million people directly or indirectly. In a country like India, the demand for cement is derived chiefly from the housing sector. One-fourth of the demand comes from the infrastructure sector and about 10-15% demand is generated from the commercial construction sector.
According to an ICRA report, the cement off-take continued to be weak in FY2018 and showed only a marginal increase of 0.5% in November 2017. Based on the current trends, the demand for cement is likely to report a modest growth of around 2% in FY2018. Though it registered a y-o-y growth of 17.3% in November 2017, this was primarily due to the base effect arising out of low production of 20.5 million MT in November 2016.
FY 2017-18 was a difficult year for the industry, with growth coming down to low single digit figures. The most obvious cause was the slowdown in the housing sector. There were also a few challenges in FY2017-18 like the ban on sand mining and use of pet coke, diminished market concentration of industry leaders, implementation of the Real Estate Regulatory Authority (RERA) Act, and widespread drought situation. But in Q3 of FY2018, production increased by 11.6% to reach 75.6 million MT supported by demand in Andhra Pradesh, Telangana, the eastern (except Bihar) and western markets. Also, production was lower in Q3 FY2017 on account of demonetisation.
Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Ratings, said, “Going forward, the demand growth is likely to be driven by a pickup in the housing segment – primarily affordable and rural housing, and infrastructure segment – primarily road and irrigation projects. However, new project announcements from the private sector continue to remain weak and revival of public-private partnership is crucial to improve the pace of infrastructure development.”
Cement demand is expected to grow by 6-7% to reach 307 million tonnes during FY2018-19. There are a number of infrastructure projects that are planned by the government. With the approaching general elections, experts believe that there would be a greater push by all agencies to progress these projects. However, a rise in the prices of building materials will have a huge impact on the construction cost. The recent mining restriction, the doubling of prices, along with a further hike in input costs are likely to create pressure on cement consumption.
Amitabh Kant, Secretary, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India, has said that the cement industry has to grow 20-25% annually over the next three decades to meet the requirement of a rapidly growing Indian economy. In 2015, while delivering the inaugural address at the 53rd Annual Session of Cement Manufacturers’ Association (CMA), he had said that for sustained high growth of rate, manufacturing has to grow by 13-14%.
Investments by major players
A report published by the State Bank of India (SBI) in December 2017 points out that there have been some major investments in the cement sector with Emami planning to pump in around Rs 8,500 crore in scaling up its production capacity from 2.4 MT to 15-20 MT in the next three to five years. The Nirma Group has also acquired Lafarge India’s cement business with a production capacity of 11 MT.
The report further states that the Central government is also providing a push to the sector. In the last Budget, it proposed to assign infrastructure status to affordable housing projects and facilitate higher investments and better credit facilities to the sector. The government is targeting to build as many as one crore houses by 2019 under Pradhan Mantri Awas Yojana or PMAY (Gramin). Under PMAY (Urban), it plans to construct 1.2 crore units by spending Rs 185,069 crore over the next three years. Additionally, it intends to disburse loans worth Rs 20,000 crore for individual housing through the National Housing Bank. The increased allocation to rural low-cost housing under PMAY-G scheme to Rs 23,000 crore in FY18 from Rs 16,000 crore in FY17 is likely to drive a 2% increase in cement demand.
Shree Cement has undertaken two green field projects in West Bengal and Odisha to increase its presence in eastern India. These projects will attract an investment of $78 million and will be commissioned by late 2018. In June 2017, the Odisha government gave its nod to Ambuja Cement for setting up a cement grinding unit of 1.5 million tonnes per annum at a cost of $66.43 million. According to data released by the DIPP, cement and gypsum products attracted Foreign Direct Investment (FDI) worth $5.25 billion between April 2000 and September 2017.
Owing to Prime Minister Narendra Modi’s demonetisation drive on November 8, 2016, there was a sharp decline in the demand of cement as the real estate sector suffered a setback. According to Ambit Capital, cement production growth slowed to 0.5% in November and fell by 9% in December, taking production growth for the first nine months of FY17 to a mere 2.6%. However, the industry recuperated from the demonetisation shock faster than expected. A report written by Ambit Capital analysts Nitin Bhasin and Parita Ashar, states, “Despite cement demand in FY17 being the weakest in 10 years, average prices have increased by 5% as they are more of a function of supply moderation and pricing discipline than demand growth.”
The report also stated that while the northern, central, and western regions will drive prices for the sector, southern and eastern regions will drive demand due to expanding demand from their real estate sector.
Northern India is considered to be the most hit in regard to the demand for cement due to a higher proportion of rural population that lacks adequate access to the banking network. The southern region, however, continued to maintain the moderate cement demand growth as it has access to more banking coverage. It is also more urbanised and was less affected by demonetisation. During FY17, the region witnessed a fair growth due to the newly constructed Amaravati, in the state capital of Andra Pradesh.
Cement demand is expected to increase by 5%to 5.5% in FY18. The emphasis on affordable housing, particularly in rural housing, and a push towards infrastructure are likely to push up the demand.The government is also planning to develop 500 new cities. The large-scale urbanisation and rising demand for affordable housing is likely to set the demand for cement soaring. Industry experts opine that rural or low-cost housing under the Pradhan Mantri Awas Yojana Gramin Scheme will propel demand for cement to maximum levels.
According to research and rating agency, CRISIL, the incremental demand in the country’s cement sector will outpace the incremental supply over the next three financial years. Though infrastructural projects like construction of roads, flyovers and highways and metro projects, will increase the demand for cement, it is the housing sector that will take up the lion’s share when it comes to the consumption of cement.
A higher slab of 28% GST allocated for the cement sector has also contributed to subdued growth. The Cement Manufacturers Association (CMA) has already expressed concerns over the high GST rate. A gradual reduction is also expected in the mortgage rates, which could bring back some genuine demand. An ICRA report states that, based on the current trend, cement demand is likely to report a modest demand growth of around 2% in FY2018.
According to CMA’s annual report of 2015-16, India is facing a surplus capacity situation of above 130 million tonnes implying that the capital investment being more than Rs 1.10 lakh crore is lying stranded. As per figures by the Ministry of Commerce and Industry, export of cement and clinker from India during FY16 was 6.19 million tonnes.
Recent trends in the cement industry
The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70% of the total cement production of the country. A total of 210 large cement plants account for a cumulative installed capacity of over 350 million tonnes, with 350 small plants accounting for the rest. Of these 210 large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan, and Tamil Nadu.
Presence of small and mid-sized cement players across regions is increasing. That is diminishing market concen-tration of the industry leaders. Many foreign players have also entered the market. India has joined hands with Switzerland to reduce energy consumption and develop newer methods for more efficient cement production.
Under the Union Budget 2017-18, $3.42 billion has been allocated to achieve government’s mission of ‘Housing for All’ by 2022. The housing sector accounts for nearly 67% of the total cement consumption in India. Additionally, the Indian government has decided to adopt cement instead of bitumen for the construction of all new roads as cement is more durable and cheaper to maintain than bitumen in the long run.
Mergers and acquisitions are increasing in the sector as it was seen in 2016 that two out of five merger deals took place in the cement industry. UltraTech Cement acquired Jaypee Group’s cement business for $2.38 billion. Lafarge India sold its business to Nirma for $1.4 billion in 2016. In January 2017, JSW Cement bought 35.6% stake in Shiva Cement for an estimated amount of $14.42 million.
In September 2017, the National Company Law Tribunal (NCLT) approved the amalgamation of Trinetra Cement Ltd. and Trishul Concrete Products Ltd. with The India Cements Ltd.
The cement industry has been hit by a gross mismatch in demand and supply. This has led to poor capacity utilisation of less than 70% which has further stunted the sector’s growth. A report by ICRA stated that despite the government’s push for infrastructure development, the sector may face pressure on its profitability given the rising costs of input materials and capacity utilisation. The report added that cement makers have witnessed rising energy and freight costs on the back of higher prices of pet coke, coal, and diesel during the first half of 2017-18.
The biggest cause of worry is the uncertainty over pet coke imports. Given the demand and supply scenario of domestic pet coke, any restriction in import of pet coke would force the industry to resort to coal which is a more expensive proposition. In the absence of price elasticity and the inability of the market to absorb higher prices of cement, margins are likely to remain under pressure as well. The rise in coal prices by 44% has resulted in higher power and fuel expenses during the period. A 7% rise in diesel prices has also increased among major cement makers in the industry. As cement is an extensively energy-consuming sector, any rise in fuel prices will have adverse impact on the profit margins.
An Economic Times article stated that, during FY2018, cement production witnessed a marginal growth of 0.6% at 190.0 million MT compared to 188.8 million MT during FY2017. Production declined by 3.3% in Q1 FY2018 and by 0.4% in Q2 FY2018 on a y-o-y basis. During Q1 FY2018, demand was adversely impacted due to various local issues across regions. In northern India (especially in Uttar Pradesh and Punjab), the off-take was impacted by sand shortage and labour unavailability, while in western India, the implementation of the RERA Act resulted in a real estate slowdown. In southern India, Tamil Nadu and Kerala were worst hit as demand was affected due to sand shortage, drought (impacting rural off-take) and weak housing activity.
During Q2 FY2018, GST implementation issues, monsoons, and continued sand unavailability impacted demand. In the western and eastern markets, prices are higher by Rs 25-35 per bag in FY2018 compared to the same period in the previous fiscal.
The government’s focus on infrastructure and housing in the Union Budget 2018 will give a push to the cement companies. About 67% demand for cement comes from real estate and housing, and hence the Budget is expected to create cement demands in the market.
Increased allocation of the Budget for rural housing is also likely to drive cement demand up by 2%.The Reserve Bank of India (RBI) recently allowed banks to invest in Real Estate Investment Trust and the Infrastructure Investment Trust, which will help revive the infrastructure and realty sector and will ultimately benefit the cement industry. Be it in irrigation, affordable housing, roads, highways or smart cities, almost all the players have high hopes from the current government as far as infrastructure spending is concerned. If the government delivers on this, the cement industry will look up.