Ready Mix For A Concrete Future

Updated: May 24 2003, 05:30am hrs
Last year (2002-03) the Indian cement industry grew at a healthy 9 per cent despatching 111 million tonnes as against a 102 million tonnes in 2001-02. This was predominantly due to a robust demand from highway projects and a growing housing sector. Two consecutive years of steady volume growth should have ideally, pushed the movement of stock prices on an upsurge, but the bourses do not seem to be impressed. On the contrary, cement stocks have suffered due to a lacklusture profitability growth.

Despite demand being price inelastic, due to lack of substitutes, the Indian cement industry has not been successful in effectively stabilising prices, which have continued to be highly volatile, fluctuating between Rs 105 to Rs 170 per bag, across various parts of the country. Prices have been low for the last 5-6 years. Todays prices are even lower than those existing in 1995-96, says Mr A V Srinivasan, Secretary General, Cement Manufacturers Association of India.

According to the Centre for Monitoring Indian Economy (CMIE), while production has grown at 11 per cent between April 2002 and January 2003, prices have actually fallen by 12 per cent in Mumbai. Prices touched their lowest levels in the second quarter of 2002-03. As a result, companies like ACC, Gujarat Ambuja and Grasim reported a 13, 16 and 15 per cent fall respectively in realisations during this period.

Capacity Additions
Why is it that a healthy demand has failed to have a cascading effect in strengthening price Since the stock market boom in 1994, there has been hectic capacity additions in the cement industry. Between 1993 and 1997 cement capacity increased by over 35 per cent, with an average annual addition of 8.5 million tonnes. The growth in capacity at 10.54 per cent outpaced consumption growth at 8.8 per cent. Much of the impulse for mass capacity expansions had stemmed from reforms and the promise of rapid industrial growth, which was far slower than expected. What perhaps made the projections haywire was one single year that set us back. The year 1999-00 saw a negative growth of 2.5 per cent and that jeopardised the equations significantly, says Mr A K Jain, President (Marketing), ACC.

Due to regional imbalances between demand and supply, price volatility has also been predominant in certain clusters. The eastern region, which consumes roughly 13 per cent of the cement produced, have witnessed fairly firm prices. This is largely because the four main players in this market Lafarge, Larsen & Toubro, ACC and Ambuja, have long-term stake in the cement business, says Mr Jain.

Prices have been most volatile in Maharashtra and south India, primarily because 70 per cent of all the capacity additions in the past three years have been in these regions. The healthy prices and steady demand that prevailed in the late nineties, compounded with the hopes of taking advantage of the sales tax incentive, which was being revoked with effect from January 2000, made companies add fresh capacity to the tune of 10 million tonne in a short span of time, in the souther region alone. The excess supply have dampened the prices and adversely impacted the fortunes of the companies.

Says Mr V M Mohan, General Manager (corporate finance), India Cements Ltd: Bunching of fresh capacity was something the industry could have avoided. The withdrawal of the sales tax incentive forced many companies to prepone their expansion plan, resulting in a sharp increase in capacity at a rate significantly faster than demand growth. India Cements which had expanded its capacity rapidly mostly through acquisitions (from 2.6 million tonne per annum in 1991 to 10 million tonnes in 2000) found itself caught in the wrong foot when there was a sharp increase in the regions industry capacity. As the prices fell its assumptions went awry. Prices have been as low as Rs 110 per bag in Andhra Pradesh, where it has a large section of its capacity. Ironically, the most aggressive player in South India, is today forced to sell most of its acquisitions to ensure its survival.

Even in Gujarat the situation is tight, with a 12 million tonne capacity outstripping demand of a mere 7 million tonne. Sanghi Cements addition of over 2 million tonnes in November last year has aggravated the price war further. Any new capacity in a surplus state is a challenge, but so far Sanghi has not made a dent in the Gujarat markets, says Ms Anil Singhvi, wholetime-director, Gujarat Ambuja Cements.

The northern markets which was plagued by excess supply for many years have now reached a kind of equilibrium between demand and supply. By the end of this year we should see demand overtaking supply in this market as no capacity additions are on the anvil, says Mr Jain. Once bitten, twice shy, cement companies, naturally, are adopting a wait and watch situation before taking decisions to add further capacity. Says Mr Singhvi: It is unlikely that there will be a shortage situation, regional imbalances will lead to cement moving larger distances and we are likely to see some brownfield expansions by middle of 2004. Some industry observers believe that, the supply demand gap is as high as 25 to 30 per cent and it will take a minimum of 5 to 6 years to bridge this gap.

Cost Management
To overcome this pressure of low realisations, most of the cement companies have taken concrete measures to reduce costs. Players are being forced to be efficient and the non-serious players (multi product companies with cement as side business) are reviewing their existence, says Mr Srinivasan.

Madras Cements, for example, has attacked costs aggressively. When others in the industry were firmly believing that increase in prices was the only way to make profit, Madras Cements focussed on cost reduction and efficiency as the route to profitability and this has ensured that our performance is far better than the industry, says Mr A V Dharmakrishnan, Senior vice-president (finance), Madras Cements Ltd. ACC too has been attacking costs on all fronts, be it manpower, raw materials, power, divesting other unrelated businesses to overcome the crisis that it underwent between 1997 and 2000. Gujarat Ambuja, the cost efficient player in the industry could protect itself from the adverse movement in the realisations. L&T and Grasim, on the other hand, was able to withstand the onslaught on prices due to their diversified portfolio.

Export Thrust
Cement companies like L&T, Gujarat Ambuja, Saurashtra Cements, Sanghi Cements are also looking at the exports market. Exports grew from 4.2 million tonne in 2001-02 to nearly 7 million tonne in 2002-03. Prices in the exports market have seen an upward climb from an average of $21 in December 2002 to $25 in May 2003.

However, there is a limit to which companies can explore export markets or depend on operational efficiencies to boost bottomline. Most manufacturers believe that dealers artificially pull down the price, by harping on the glut situation, to extract the extra ounce of margin from them. We have reached a high level of maturity in the evolution of the business, in quality and in operational efficiencies. It is time now for us to face the situation collectively and not allow ourselves to be dictated by dealers and distributors, says Ms Singhvi. There is pressure on us from both sides, the company wants us to do more volumes and the customer wants the cheapest rates. If I cannot play on price, the customer has several other dealers who would cater to him, says Ms Shanam Patel, Vice-President of the Cement Stockists Association and a dealer of L&T and Grasims Birla White brand. If prices move within a band of Rs 125 to Rs 160, consumption will also go up, says Mr Singhvi. Price volatility often leads to deferred decisions causing a slowdown in construction activities, says a Mumbai-based analyst.

While demand is expected to grow at 9 per cent in 2003-04 on account of a host of infrastructure projects announced in the Union Budget and a blooming housing sector, what will perhaps go a long way in turning the fortunes of the industry is regular activities in both private and public sector on a continued basis. Cement consumption in the country is abysmally low. Compare Indias per capita consumption of 99 kg per year to the world average of 263 kg per year, notwithstanding that India is the second largest producer of cement, second only to China.

Consolidation Process
This is one of the reasons why, perhaps, the big daddies of the global cement industry have adopted a cautious stance before entering the market. While, Lafarge has acquired Raymonds and Tata Steels plants and emerged as one of the largest players in the eastern markets, Cement Francais, an Italcementi group company, has inked a strategic joint venture with Zuari Industries for further acquisition in the south. Cemex, Blue Circle and Holderbank is still waiting in the wings to gain a foothold. Post the 1997 Asian crisis, these MNCs have gobbled up all cement assets in Asia, except in China and India and it is time they focus their attention on India, says an analyst.

What is also crucial is that nearly 50 per cent of the cement capacity in India is vested with the four main players ACC, Gujarat Ambuja, L&T and Grasim, leaving very little scope for the multinationals to come in and emerge as national players. But they do have advantages. Multinational cement companies have the advantage of borrowing at low cost abroad, a good data base, cost consciousness and deep pockets which make them take long-term positions in emerging markets, says Mr M H Dalmia, President, OCL India Ltd. Analysts expect the second half of 2003 to witness some activity by the global players. What the MNCs lack is a clear-cut India strategy. Once they have a gameplan, it will be difficult to keep them at bay, says Mr Singhvi. Very soon, it will be a case of gobble up or be gobbled up, says an industry observer.

Effectively, a demand of 8 to 9 per cent alone cannot cement the future of the industry, as Mr Dalmia says: The government will have to make massive effort to pep up construction activities so that the industry grows at 10-12 per cent. The industry can see some upturn if the government decides to convert National Highways into concrete roads. Otherwise road construction will have negligible impact on the industry. Much will also depend on how competently the homegrown industry controls price fluctuations and ensures profitability.