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Foreign cement firms: Reports are again doing the rounds that international cement majors are eyeing a stake in sick Andhra Cements. At first sight, this seems strange, given that Andhra Cements is an inefficient cement producer, as reflected in its high coal consumption per tonne of clinker, and 120 units of electricity per tonne of cement produced. An international major could be interested in the company for two reasons. One, being a sick company, it would be available cheap, while the second reason could be limestone reserves. Andhra Cements' capacity (1.24 million tonnes) is also above the minimum economic size.
Tisco's slag cement plant in Bihar is also being eyed by French cement major Lafarge. Here, despite the locational disadvantage, the reason for acquisition could be the cost advantage of slag cement, as with the same amount of clinker consumption, cement production can double.
With FL Smidth picking up a stake in Saurashtra Cement, the question is why are international cement majors interested in Indian cement companies. The answer seems to be that the stake is available cheap, Indian promoters are willing to sell, and there is practically no possibility of any hostile bid by domestic majors, owing to a lack of funds. Cement requirement will rise exponentially on account of infrastructure needs, and that is another reason. Although that is some time away, the strategy seems to fit into the long-term prospects considered by international players. On the flip side, this offers excellent exit opportunities to all cement companies except the industry's largest players.
The dealer network will be a major criterion for picking up companies, as international players can hardly offer any product improvement. Beyond grade-53 cement, it is not possible to upgrade, because the main raw material is limestone, and the grade (kg per sq cm) depends on the quality of limestone. Even in most developed markets, though grade 63 is available, the norm continues to be grade 53. In cement, the factory cost (raw material+power+coal and fuel) for all efficient units is the same, but for the smaller fry, this is not the case. Upgrading this efficiency hardly requires expertise from abroad, but then, the required cash is not available domestically.
Oil pipelines: Reports indicate that the government plans to open the petro-product pipeline sector to private and foreign investments. This move is expected to benefit Reliance, Essar, and foreign players like Enron and Unocal. The proposed pipelines will, however, result in decreasing the viability of many planned refinery projects.
Even the existing inland refineries of public-sector units (PSUs) at Mathura and Panipat face threat of becoming uncompetitive if pipelines pass through the vicinity of their distribution network. Moreover, the retail networks of the PSUs face prospects of diminishing sales per retail outlet.
The threat of competition is always unnerving, especially when faced for the first time, and from players like Reliance. It is well-known that Reliance always puts up huge capacities before expansion in demand sets in. It then uses the huge cost advantage from economies of scale for its own benefit, and also expands the market through lower prices. So, it is unlikely that domestic PSUs were unaware of RPL's expansion plans. Nevertheless, in a market economy, with regulations on pipeline operations, other PSUs can still manage to earn decent earnings if they concentrate on their strengths rather than venture into new fields.
Let's take BPCL, which analysts believe would be most hurt by the pipeline proposals. BPCL's strength over the years has been in marketing. In spite of having less than 10 per cent of refining capacity, the company's marketing share is 20 per cent. Its retail outlets are at prime locations, and the average earnings of the outlets are only a shade below that of IBP. Strangely, BPCL has proposed to venture into petrochemicals, where it will directly compete with Reliance with extremely small capacities. Moreover, it has submitted proposals to set up additional refining capacities at Bina and Allahabad. If the company does not find the proposals in refining and petrochemicals attractive, then it should go ahead with developing its own retail outlets. Having a headstart in this area would be crucial to the continued growth in profits, because marketing margins would rise in future as India would become a supply surplus economy in petro products.
IOC must take a different route. It has the resources to compete. Venturing into an extended pipeline grid is quite logical for the company, and the pipeline will ensure that its marketing share does not fall below the present 55 per cent. But IOC needs to prepare in advance for giving a whole range of options to its bulk customers, as competition is likely to be far more marketing savvy.
HPCL is planning a foray in the north (Batinda, Punjab) and a few small product pipelines. HPCL derives approximately 25 per cent of its earnings through lubricants, and it is quite strong in the west and the south. The company can still be a strong regional player in petro products, and increase its share in lubricants to maintain its growth in earnings.
Nevertheless, the crucial thing for PSU survival is whether the government removes its bureaucratic controls over the companies. So far, the government has been trying to build a system to provide low energy cost for customers. But if simultaneously it does not give adequate powers to the PSUs, a public-sector monopoly can be replaced by a private sector one, without the benefits of market economy reaching the end-user.
With contributions from Urmik Chhaya and Manish Saxena
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
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