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CEMENT INDUSTRY IN INDIA Contents: Executive summary 1. Introduction 1.1. Objective 1.2. Methodology 2. Cement Industry : An Overview 2.1. Market Structure 2.2.

Demand and Supply Analysis 2.3. Pricing Strategy 2.4. Complementary Goods 2.5. Implication of Indirect Taxes 2.6. Demand Estimation 3. Findings 4. Conclusion and Recommendations 5. References 6. Appendix IBS Hyderabad Cement Industry in India Page | 8

Executive Summary

Indian cement industry is the second largest in the world in terms of its production capacity (1.06 billion )tones and this constitutes 6% of the total installed capacity. This industry employs over 0.14 million people and constitutes 1.3% of the GDP. Cement demand has posted a healthy growth rate in tandem with the strong economic growth rate of the country. This sector is highly fragmented with the top six players

accounting for about 60% of the total installed capacity. The major demand was witnessed from growth in IT sector, Shopping malls and integrated township segments and other infrastructural development projects. With buoyancy in the housing construction, continued emphasis on infrastructure along with the new industrial projects expected to materialize, the industry is braced with better times ahead. The demand of cement in the country can be termed as inelastic in nature, this can be authenticated by the fact that irrespective of continued price hike by the industry the demand for cement has continuously increased over the years. In order to maximize their profits the major players sometimes resort to restrictive practices by colluding among themselves and forming cartels. In determining the price of cement collusive oligopoly plays a major part. The concept of the pricing strategy and game theory was applied to analyze the price determinant of cement. Construction chemicals like admixtures, flooring compounds, water proofing compounds which are used along with cement are categorized as complimentary goods to the cement industry. These days the increased demand for cement also influences the growth of these complimentary goods. The impact of indirect tax is very pronounced in case of their effect on the price of cement. Owing to its inelastic demand cement manufacturers invariably pass on the tax burden to the end consumer. IBS Hyderabad Cement Industry in India Page | 9

1. Introduction

The growth of the Indian economy is no more limited to the IT and the ITES sectors , the

manufacturing sector is growing over 11 % while the growth of India’s GDP is close to 9%. A study on the sector that is increasingly driving the country towards being a super power was imperative. With the thrust on infrastructure projects, boom in housing and real state business, cement industry is growing at a tremendous pace . Growth of the cement industry is over 10% which is more than the country’s growth rate. The entry of world’s top five players in the Indian market and the ongoing mergers and acquisitions has made the Indian Cement Business very dynamic in nature. The project deals with the analysis of various factors affecting the cement industry .It focuses on the way firms behave in the highly fragmented market .By applying basic economic theory, the demand supply position has been analyzed . What are the drivers of demand and how they affect the demand – supply equilibrium is discussed. The pricing strategy pertaining to the cement market structure and demand estimation is also dealt with.

1.1. Objectives

1. To study the market structure of the cement industry in India. 2. To study the demand-supply analysis. 3. To analyze the pricing strategy adopted by the players. 4. To study the influence of indirect taxes on the sector. 5. To estimate the future demand of cement in the country. 6. To understand the future prospect of the industry. IBS Hyderabad Cement Industry in India Page | 10

1.2. Methodology

ramping production capacity. the concentration at the top is increasing. 6. The installed capacity is distributed over approximately 129 large cement plants owned by around 54 companies. Cross price elasticity of demand for the study of complementary goods. 2. 3. Study of implication of indirect taxes and price rationing on the basis of demand – supply model. attracting IBS Hyderabad Cement Industry in India Page | 11 the top cement companies in the world. Demand estimation using regression analysis. Analysing pricing strategy of the product on the basis of game theory. 2. 3.500 per ton of cement. large cement plants accounted for 93% of the total installed capacity in India. global demand and increased activity infrastructure development such as state and national highways. Analysis of drivers of demand and the demand and supply situation prevailing in the country on the basis of secondary data. The fragmented structure is a result of the low entry barriers in the post decontrol period and the ready availability of technology. The structure of the industry is fragmented. 3. Analysis of the Market Structure on the basis of secondary data. However. which translates into an investment of Rs. the cement industry outpaced itself. The Indian cement industry is on a roll.An Overview Major players and their endeavors With an installed capacity of around 157 million tons per annum (mtpa) at end-March 2006. 4.1. cement plants are capital intensive and require a capital investment of over Rs. 5.500 million for a 1 mtpa plant. Driven by booming housing sector. Cement Industry . and sparking off a spate of mergers and . although.

1.6 percent in the previous year. 2006. further boosted by a 12 percent rise in the consumption in Gulf countries and massive redevelopment efforts in Iraq and Afghanistan. accounting for about 6. Ultra Tech Cement reported a whopping 1550 percent rise in net profits at US $17. Mangalam cement saw its bottom line swell by 173 percent. higher sales and lower production costs. Cement and clinker exports are poised to touch the 10 million tonnes (mt) marked by the end of 2006-07. 2. 4. Housing and Infrastructure Boom The recent boom in housing and construction industry in India has worked wonders for cement manufacturing companies as they registered an average growth of 95 percent in their net profits for the quarter ended March 31.acquisitions to spur growth. 2006.4% of the global production of 2. IBS Hyderabad Cement Industry in India Page | 12 Mergers and Acquisitions . 5. 3.1 percent over the past two decades. Sanghi cement recorded a 455 percent growth in the net profit.69 million in the last quarter 2005-2006. India produced 142 million tones of cement.17 million. Cement production has logged on an impressive growth of 13.3 percent in 200506 as compared to only 3. Major cement companies witnessed a 32 percent surge in their sales volume and. The result of this hectic activity is: 1.81 million. In 2005. companies registered high production.22 billion tones. This position has been achieved because of India’s sustained growth at an average rate of 8. Net profit of the top ten cement companies more than doubled during the quarter ended June 30. 3. Gujrat Ambuja grew by 109 percent to US$ 64. 2. ACC net profit rose 27 percent to US $ 50. across the board.

four of the top five cement companies entered India through mergers. 3. 1. Grasim taking over Indian Rayon’s Cement division. bringing smaller players under the umbrella of the larger companies. 7. Multinational cement companies have been aggressively picking up stakes in large Indian cement companies. Holcim: Swiss cement major Holcim has picked up 14. and larger companies coming under the umbrella of the global players like Holcim and Heidelberg Cements. L&T taking over Narmada cements. Within a short spam 2005-06. an indirect. joint ventures or greenfeild projects. India Cement taking over Rassi cements and Sri Vishnu Cement. both in India and abroad. Gujrat Ambuja taking a stake of 14 percent in ACC. had acquired 200 million equity shares of GACL at a . Grasim’s acquisition of the cement business of L&T. The Indian cement industry has also witnessed a flurry of mergers and acquisitions within the domestic players. has attracted global majors to India. Some examples of the consolidation witnessed among domestic players in the recent past include: 1. 4. wholly owned subsidiary of Holcim. These include France’s Lafarge. Grasim taking over Sri Digvijay cements. ACC taking over IDCOL.The booming demand for cement. 6. Gujrat Ambuja taking over DLF cements and Modi cements. 5. IBS Hyderabad Cement Industry in India Page | 13 Holderind Investment (Holcim Mauritius). acquisitions. Holcim from Switzerland.8 percent of the promoters’ stake in Gujrat Ambuja Cements (GACL). Italy’s Italcementi and Germany’s Heidelberg cements. In January 2006. 2.

Italcementi: Italy based Italcementi has acquired a stake in the K. Heidelberg cement is expected to take 50 percent controlling stake in Indo Rama’s grinding plant of 0. Heidelberg is also taking over the Mysore Cement KK Birla group at a consideration of US $ 93 million.K.1 mt. Ultratech Cemco ltd.28 per share from the promoters.75 mtpa at Raigad in Maharashtra.64 mtpa.4 mpta. the Holcim-ACC-Gujarat Ambuja Cements combine (capacity of 33. Through this holding company Holcim acquired a majority in Ambuja Cement Eastern and a substantial stake in ACC. Heidelberg cement has entered into an equal joint –venture agreement with S P Lohi controlled Indo-Rama cement. and acquired a 67 percent controlling stake in Ambuja Cement India. . IBS Hyderabad Cement Industry in India Page | 14 The Top Ten The consolidation of the cement companies has lead to the top ten cement companies dominating cement production in India.price of US$ 2. 4. 3. 2. Ambuja Cement India holds 35 percent shares in ACC and a 97 percent stake in Ambuja Cement Eastern. Holcim had entered a strategic alliance with GACL. Holcim’s acquisition has led to the emergence of two major groups in the Indian cement industry. Heidelberg: Recently. ACC is the largest player with a capacity of 18.5 mt) and the Aditya Birla group through Grasim industry and Ultratech cement combined capacity of 31. Birla promoted Zuari Industry cement in Andhra Pradesh with a capacity of 3. As on March 2007: 1. Now occupies the second slot with a capacity of 17 mtpa. Lafarage: The French cement major has acquired the cement plants of Raymond and Tisco in the recent past and has an installed capacity of 5 mtpa. 2.

12 mtpa.30% 33.40% 3.40% 3.50% LAFARGE 3.86 mtpa.90% 10.80% 34.30% CENTURY TEXTILES AND INDUSTRIES LIMITED 5.80% 13.20% 10. Jaypee Group.10% 9.10% 11.00% 12. NAME OF THE MAUFACTURER 2001 2002 2003 2004 2005 2006 ACC LIMITED 11.90% 10.10% 10.20% 12. ACC: ACC’s January 2006 cement production stands at 11.08 .90% 11.20% 34.50% 13.70% GUJARAT AMBUJA 10.30% 10.90% 3.70% BIRLA CORP LIMITED 4.60% 8.40% 5.80% 4. Lafarge cements and Aditya Birla corp.80% 3.50% 10.20% 12. 4.80% 4.30% 10.90% JAIPRAKASH INDUSTRIES LIMITED 2.3.80% 4.80% IBS Hyderabad Cement Industry in India Page | 15 ENVIRONMENT ANALYSIS—PORTER’S MODEL IBS Hyderabad Cement Industry in India Page | 16 Sustained growth Top players like ACC and Aditya Birla Group have reported higher production and dispatches in 2006 as compared to figures of the corresponding period in 2005.60% ULTRATECH CEMENT COMPANY LIMITED 11.20% OTHERS 34.80% 5.40% 5.30% 4.10% 35.70% 34.20% 3.10% 10.40% 5% 4.70% 9. Century textiles.10% 4.90% 3. Gujrat Ambuja group has emerged as the third largest group with a capacity of 14.60% 4.60% THE INDIAN CEMENTS LIMITED 7.50% 10. Madras cements.10% 5.30% 5.30% 10. 5.30% 3. Grasim ranks fourth with a capacity of 14.20% 4% 4.10% 3.80% 3.13 mt and dispatches at 11.80% 3.60% GRASIM INDUSTRIES LIMITED 9. Other leading players include India Cements.

73 mt is up by 6. Economies of scale resulting from the larger size of operations 2. Some of the key benefits accruing to the acquiring companies from these acquisition deals include: 1. Savings in the time and cost required to set up a new unit 3.6 percent over the corresponding last year. Market Structure Predominantly there are four types of competition in a market : 1) Monopolistic competition . IBS Hyderabad Cement Industry in India Page | 17 2. Grasim and UltraTech: The Aditya Birla group’s combined dispatch of cement and clinker during April/August 2006 is 12. the outlook for India’s cement Industry is exceedingly high. benefits of tax shelter. Access to new markets 4.28 mt and 10. The combined dispatch of cement and clinker at 2. And. the cement industry is witnessing a number of Mergers & Acquisitions (M&As).mt as compared to 10.1. This concentration is mainly because of the focus of the larger and the more efficient units to consolidate their operations by restructuring their business and taking over relatively weaker units.33 mt in August 2006 is higher by 4. the government’s emphasis on infrastructure (at both national and state level) and increased global demand. Given the sustained growth in the housing sector.9 percent over Aug 2005. The relatively smaller and weaker units are finding it difficult to withstand the cyclical pressure of the cement industry.3 mt for January-July 2005. As discussed above. Access to special facilities / features of the acquired company 5. The extent of concentration in the industry has increased over the years.

Oligopoly is said to prevail when there are a few firms or sellers in market producing or selling a product in other words when there are two or more than two.2) Oligopoly a) Duopoly b) Triopoly etc. In the Indian cement industry the major players often resort to cartelization to increase their profits margins by creating artifitial shortages in the market. limiting supply. or other restrictive practices. 1) Market Share. Cartels typically control selling prices.2. producers or sellers of a product oligopoly is said to exist. but not many.. The aforesaid statement can be validated by the recent summoning of the major players by the Monopolies And Restrictive Trade Practice (MRTP) 2. Demand and Supply of Cement industry in India Factors affecting the demand of Cement 1. IBS Hyderabad Cement Industry in India Page | 18 2) Group Behavior Cartelization A cartel is a group of formally independent producers whose goal is to increase their collective profits by means of price fixing.In the context of Indian cement industry falls under the oligopolistic competition as majority of the market share is controlled by a few players. but some are organized to control the prices of purchased inputs and this phenomenon is known as cartelization. Industrial activity . Economic growth 2. The graph below depicts the above mentioned statement. 3) Perfect Competition Oligopoly.

9% of GDP.. Investments in core infrastructure projects 5. Population 6. Many mega projects such as the metro rail project in many cities of India is an example where growth rate has influenced the demand of cement.In the Indian context it is a very important factor as now the economy of the country is growing at 8. The demand for office spaces. A growth in the industrial activity influences the demand for cements directly as cement is the basic raw material which is used in the construction process. Number of consumers Economic Growth. Mittal Arcelor etc. Real estate business 4. Real estate sector. Residential complexes has increased by leaps and bounds it is estimated that New Delhi alone will require a two times increase in hotel rooms due to the commonwealth games. Hence we can say that there has been an increase in demand due to the increase in industrial activity.3. The demand for residential spaces has also increased due to an increase in population etc. Investments are also coming up in the hydel power sector where there is no substitute for cement.As the nation today is witnessing a high growth rate consequently the real estate sector is also witnessing a boom.Industrial activity directly influences the demand of cement. Investments in the core sectors – India is now a preferred destination for investments in . Industrial Activity. the demand for quality infrastructure has increased. As we know that India is now among the two fastest growing economies of the world and hence there are a huge number of industrial projects in the offing such as POSCO in Orisssa.Cement industry is an industry whose demand depends upon the economic growth of the country because a high growth rate will require a good infrastructure which will require cement thus driving its demand . IBS Hyderabad Cement Industry in India Page | 19 Hence.

Therefore when IBS Hyderabad Cement Industry in India Page | 20 the price of related goods falls the demand for that good decreases and when the price of the related good increases the demand for that particular good rises.recent years. As a result of this the demand for housing has increased which has led to a no of housing projects coming up which has driven the demand for cement. Number of consumers.Demand for a good is also affected by the price of the other goods especially those which are related to it as substitutes. As we can see that the demand is highest in the month of August which drops down to its lowest value in the month of September and again rises in the month of December. Ep = Percentage change in quantity demanded Percentage change in price . Steel and glass are trying to emerge as an alternative to concrete but it is still far away from being a supplement to cement. Changes in the price of related goods. In the context of the cement industry this factor is more or less insignificant as there are no close substitutes. Arcelor-Mittal to name a few. Population. other things remaining constant. Elasticity of Demand Price Elasticity of demand is defined as the percentage change in quantity demanded resulting from one percent change in the price of the good. The graph below gives the demand for cement for the year 2006. India has seen major corporate houses setting up shops in India including Greenfield projects of POSCO.The greater the number of consumers greater is its demand .India is the second largest populated country of the world. As there are a large number of real estate developers with a flurry of new projects the demand for cement is on the rise. This has led to an increase in demand of cement.

Determinants of Elasticity of Demand Closeness of substitutes – As cement has no close substitutes hence we can say that closeness of substitutes doesn’t play an important role in determining the elasticity of demand.IBS Hyderabad Cement Industry in India Page | 21 The demand for a good is said to be inelastic if a change in price howsoever large causes less than proportionate change in the quantity demanded i. a small number of players control the majority of the market share this is because the entry barriers to this sector is quite high and hence only about 10 players control majority of the market share. The market for cement can be termed as oligopolistic in nature ie. Taxes and subsidies .e %change in quantity demanded < % change in price Ep < 1 The demand for cement is inelastic in nature ie. a small change in price produces less than proportionate change in the quantity demanded. Effect of elasticity on revenue – As cement has an inelastic demand hence we can infer that as revenue decreases when price decreases as the percentage change in quantity demanded is less than the percentage change in price. Price of factors 2. Although some big players in the construction industry have started using steel structures with glass to build integrated structures but this concept is in nascent stage in India and hence we can not consider this to be a true substitute for concrete structure. IBS Hyderabad Cement Industry in India Page | 22 Supply of Cement in India Factors affecting the supply of cement industry in India 1.

there was rampant cartelization and RBI had exhausted all its resources to control the inflation and the demand was still robust even after price hike. The government levies taxes and excise duties to control the inflation rate. 2.Taxes and subsidies influence the supply of a product. Price of Factors. output or product of its rival player which then retaliate by adjusting his price.2. The third aspect which determines the price of cement in an oligopolistic environment is . In view of the fact that a firm in a oligopolistic industry competes by changing the advertisement cost. The most important factor is the interdependency of various players in decision making which comprises the industry. few characters which are found in oligopolistic market also affects here in determining the price of cement. Taxes and subsisdies. 2.In general when the price of factors namely labor and raw materials increases the cost of production increases as a result the supply decreases. imposition of sales tax causes a leftward shift in the supply curve. In case of cement the main raw material for is limestone if the price of limestone increases the cost of production increases resulting in decrease in supply. output etc. Another important factor in price determination is the advertising expense. Because in this segment since the major players are few. the presence of competitive condition can hardly be denied. quality of product.1. In case of the cement industry in India the price of cement was increasing. IBS Hyderabad Cement Industry in India Page | 23 the change in price by one player directly affects the price. If an excise/ sales tax / duty is levied on a product then the firm will supply the same amount at a higher price or a lesser quantity at the same price ie. Pricing Strategy of Cement Since cement industry is oligopolistic in nature. price.

Varying the product Various rules of game theory which are practiced in an oligopolistic economy are described briefly below and depending on these principles how the price of cement is determined is also discussed here. In Indian context few major players like ACC. The price cutting strategy and relative low price is an outcome of this. then both price as well as production tend towards monopolistic trends. Ultratech. Ambuja generally decides the price of cement. 1. In the case of such co-operative equilibrium when players act in unison and set strategies to maximize joint payoffs. Increasing advertisement expenditure 4. The 2nd rule states that if the player in the oligopolistic economy decides to collude among themselves rather than competing among themselves. the outcome of which depends not only upon his own action but also upon the actions of others who too confront the same problem of choosing a rational strategic course of action. Do the members pull together in promotion of common interests or will they fight to promote their individual interest is going to determine the price. Change in price 2. In the case of oligopoly markets the various possible alternative strategies which are relevant are 1. IBS Hyderabad Cement Industry in India Page | 24 2.Lafarge. This is the case of cement sector in India. If the player in an oligopolistic economy are competitive and are non-cooperative then ultimately industry price and also the quantity of production tends towards perfectly competitive market. Change in level of output behavior. They often form a . GAME THEORY The game theory seeks to explain what is the rational course of action for an individual or firm who is faced with an uncertain situation. Grasim.

2. So the market share remains unchanged. capitulation to stronger firms.In many cases there is no stable equilibrium for the oligopolistic market . A large . Here maximum profit equilibrium reaches at point E. So the firm’s demand curve has the same elasticity as the Industries’ demand curve. Recent frequent mergers and acquisition taking place in the cement industry is an example of this. Construction chemicals are used as an additive to concrete/mortar or as an application on masonry surfaces. These chemicals modify and enhance the properties of concrete in fresh and hardened state. The optimal price for collusive oligopolistic is shown as point G on DA just above point E. IBS Hyderabad Cement Industry in India Page | 25 Here DA is the demand curve for a player A and the assumption is that other few players also follows A in increasing or lowering the price.cartels setting high price and dividing all profits in equal proportions but it is not always easy to achieve and sustain co-operative monopoly as cartel and collusion are basically restrained and are considered to be illegal in most of the market economies. But the loophole in the law is that it is very difficult to detect cartelization. The Collusion Game It states that a cooperative equilibrium comes in to play when the players in oligopolistic market act in unison to find strategies which will maximize their joint payoffs. So this can be termed as collusive oligopoly. 3. Construction chemicals as a complimentary product to cement Construction chemical is a generic name assigned to describe a wide range of chemicals that are used in pre and post-construction stages. punishing weaker players etc.4. the intersection of firm’s Marginal cost(MC) and marginal revenue(MR) curve. Strategic interplay often leads to unstable outcomes as firms start indulging in price wars.

Admixtures contribute about 30-33 percent. Now since the application of construction chemicals are directly related to the use of concrete/cement products. . Water Proofing Compounds Complementary good is defined as a good that should be consumed with another good.Flooring Compounds. out of the total construction chemicals (exploited market at this stage). etc As per the estimation . its cross elasticity of demand is negative. Adhesive etc) IBS Hyderabad Cement Industry in India Page | 26 4. This means that. repair and rehab products 15 percent. The Indian Construction Chemical Industry. The major players present in this sector in India are FOSROC. (Examples are Grouts. termed as a `sunrise industry`. if goods A and B were complements.MBT . 1. Easy adaptability to foreign technology and the entry of foreign companies in the construction sector have helped to change the mindset of the people that has eventually resulted in quicker growth of the construction chemicals sector. it can be very well categorized as a complementary good to cement. Repair & Rehab and other products. construction chemical market can be segregated into.Dr FIXIT. water-proofing products about 20 percent. The Indian construction chemical industry. more of good A being bought or consumed would result in more of good B also being bought or consumed.variety of formulations and chemistries are used for diverse applications during both pre and post-construction stages in order to impart special properties to concrete structures.From a scratch in late nineties this industry has emerged as a force to reckon with having an annual turn over of more than 350 crore and is growing at a rapid pace.CICO. For the sake of convenience. Admixtures 2 . 3. industrial flooring about 20to 23 percent. is already showing colours .

1000 per tonne or Rs. 50 per bag this is close to the highest tax rate that the sector pays in any other country. For several projects funded by multilateral agencies like the ADB and World Bank. price rationing) but recent liberalization(opening up to demand-supply forces) of the sector due .and the rest is contributed by sealants and other auxiliary products. 4. as construction chemicals are sensitive products and its use requires basic technical expertise. Thus the industry has always shown that the impact of direct and indirect taxes on this core infrastructure product has always been high. 2. The implication of indirect taxes on the cement industry in India: Cement is a capital intensive sector.5 . The fact is that in the past several years cement was sold at an un-remunerative price (due to governmental regulations viz. Since the use of Ready Mix Concrete (RMC) is the norm of the day and this product ultimately demands higher workability for a longer period as it is to be transported from one place to another. With levies ranging close to Rs. So it can be concluded that rapid growth in construction industry has resulted in rapid growth of cement industry and ultimately the growth of construction chemicals as complementary goods to cement 2. 3. the use of construction chemicals is mandatory. Major factor attributed to the growth of construction chemical Industry 1. It is used to impart more strength to concrete at pre and post construction stages and hence used extensively now a day. so use of admixture is must for this. The new skill set practiced by skilled worker force in construction activity now a day due to the boom in this sector made it possible the extensive use of IBS Hyderabad Cement Industry in India Page | 27 construction chemicals.

sales tax. But inspite of all these limitations on them the cement manufacturers are of the view that the price of cement in the country is competitive with respect to the international prices. royalties on limestone and Coal. and to promote imports.000 crore. in order to reduce cement prices which it can ultimately pass on to the consumers. This will facilitate much-needed infrastructure development as also the construction activity in the country which is the need of the hour. IBS Hyderabad Cement Industry in India Page | 28 The following table shows the effect of indirect taxes on the price of 1 ton of cement in the country as on financial year ending 2006. Duties and levies on cement (Rs/Ton) VAT 362 . it will be more than Rs 12. and if State and Central levies are taken. In 1980. The industry has always pleaded for a reduction in the tax rates. The industry is the second largest contributor of excise duty. This table clearly shows that the sum total of the levies on the sector viz. It carries the largest burden for an infrastructure building material. Cess et al) is quite high. Cement has traditionally been the beast of burden. Thus the government in a bid to reduce the burden on the end consumer. But the government believes that the current price of cement is still very high. vis-à-vis the international price. if India has to become a developed country. has decreased the import duty for cements to zero. So it should not deny the industry its due share of profit when the market is better and the economy is looking up. The Government must understand that for years they have collected a substantial levy from the industry when the economy was in the doldrums. it contributed Rs 170 crore to the exchequer. ( excise market dynamics has resulted in a more reasonable price for cement.

Customs duty on pet coke reduced from 20% to 10% Excise duty on clinker increased to Rs 350 per tonne from Rs 250 per tonne. Tax breaks on specified housing projects have been extended till 2005.Excise 408 Royalty on limestone 69 Royalty on coal 22 Duties on power tariff 27 Octroi 23 Others 20 Total 931 IBS Hyderabad Cement Industry in India Page | 29 Budget 2003-04 Budget 2004-05 Budget 2005-06 Excise duty on cement hiked by Rs 50 to Rs 400 per tonne. Additional 2% education cess on all direct and indirect tax. Major announcements on the infrastructure side including roadways. Customs duty on cement . airports and convention centres.

Hence the price of cement went up. now this is a straight line given the inelastic demand. and the consumers had to pay higher money for the same quantity of cement. So in this case the tax is given by (p’-p) which is the .reduced from 20% to 15% in line with the reduction in peak customs duty rate. however when the government decided to impose additional tax to the industry then the cement manufacturers (suppliers) decided to pass the burden to the end consumers IBS Hyderabad Cement Industry in India Page | 30 (buyers). Now when the market forces were allowed to control the price the price was at P.(owing to the relative unsubstitutibility) i. Cement has an inelastic demand curve. To understand this concept better lets study the following graphical depiction: In this graph the demand is shown by the line DD. Thus the entire tax burden is passed on to the end consumer.e. cause the demand remains the same. Thus in-effect the consumer has no alternative but to pay the higher prices. The supply is shown by the lines SS(before excess tax) and S’S’(after excess tax). thereby hoping to increase the supply from abroad. Incase of the domestic cement industry the government has tried to nullify this increase of price (by the domestic players) by cutting down on the imports duty on cement. as a result the price of cement goes up. Deduction of upto Rs 1 lakh on the repayment of principal amount of housing loan. even if there is a upward shift (increase) in prices of cement even then the demand does not decrease or vary to a large extent. In such a scenario the basic concept of the tax implication on the demand-supply dynamics is given as follows: Since the manufacturers (sellers) know that even if the tax burden (set by the government) is passed on to the consumers (buyers) even then there is no loss from their side.

e price ceiling was established. Demand estimation Demand for cement is forecasted and tabulated in the Table --------. IBS Hyderabad Cement Industry in India Page | 32 2. i. This led to a severe shortage (shown by the portion AB) in the period prior to the early 1980’s. hence this affected their profit margins of the companies to a large extent. inspite of the sustained demand.6. the suppliers were only (producing/supplying) Q quantities of cement. Assumptions made : . The effect of price rationing on the industry Till the year 1982 the cement industry was subjected to unlimited regulations by the government. In view of this limitation that was imposed on the industry the cement prices remained at artificially low levels.extra money that buyers had to pay. the price was kept very low. The manufacturers had to stick to the predetermined price set by the government. The market dynamics had no influence on the pricing. the government used to set a fixed price at which the sellers had to sell their produce. Thus although there was sustained demand in the market. IBS Hyderabad Cement Industry in India Page | 31 Lets try to understand this through a graph: In this graph the demand (DD) supply(SS) dynamics determined the equilibrium price of the cement. Now due to governmental intervention on the price. At this price the cement manufacturers did not have the incentive to produce more and more cement because their profit margins were considerably decreased.

80876XPdn – 0. Regression Analysis was carried out using Microsoft Excel and the result is shown in ………. Variables are also forecasted. From the regression analysis we obtain the following equation: Y = 0. 6. the local players charge lesser price than players having national presence. GDP .3568 Where Y = Demand in million tons per annum . The variables for demand estimation are Price.Their expansion plans to meet the rising demand . Demand for cement is inelastic . 2. But. IBS Hyderabad Cement Industry in India Page | 33 The residual plots (figure no. 4. Production increased by 14mtpa (million tons per annum) within a short span of one year . Population .The growth rate will be sustainable.. GDP will not change drastically and will continue to show the rising trend . Annual Production .1. we have assumed for the purpose of forecasting that production will not rise drastically . from 2005 – 2006due to entry of foreign players like Holcim and Lafarge who are leaders in the cement globally.appendix no……for a confidence level of 95 %. Cement has a fragmented market and the price per bag differs from one state to other state depending upon the duties.0138Xp – 56. green field projects as well as brown field projects . 7. 5.5484Xg + 0. 3. Linear model is used to estimate demand. Also. These are directly related to the drivers of demand. Price per bag used in calculation is the average price of cement per bag (50 Kg bag). is not taken into account because investment depend upon the prevailing market situation which is highly uncertain._____ show that the assumption of a linear model is appropriate as the points are scattered evenly above and below the reference line.775Xpo + 0.

For an elastic good.3 104.6596 .97 166.5 108.4127 204.9729 231.407 140. Thus .2 87. YEAR GDP IN PER POP IN crs PRICE PDN CON Xg Xpo Xp Xpd Y 2000 5 100.5 106.174 165.4 116. Xp = Average price of a 50 Kg bag Xpd = Annual Production in million tons per annum.3563 2010 9.6 102.41 152.9 111.59 150 102.6 2004 7.54 165 111.0378 2009 9.1043 195 146.6 90.5 113.954 151.6 2007 9 113.5255 2015 10.3 2002 6.2 114.86 140 93. with the increase in price the quantity demanded will decrease but for cement we have observed that the increase in price has not affected the demand and hence we can conclude that it is price inelastic.4 109.77 2008 9.71 185 127.1 2006 8.9 2005 8.4 99 2003 8.42 195 141.6 2001 5.5 118.Xg = GDP in percentage Xpo = Population in crores.4 107. If the present growth rate of economy is sustained then the government will increase the infrastructure spending which will further increase the demand of the cement.5 125.996 149. we can not directly correlate the variables average price ( Xp ) and Demand (Y) of cement.1 120 94.7677 200 149.12 170 117.6 123.0409 207. We have already analyzed that demand for the cement is inelastic and discussed the drivers of demand.0426 144.8 135.6782 147.

Demand estimation..5345 IBS Hyderabad Cement Industry in India Page | 34 A number of green field projects are coming up especially in limestone rich states like Andhra Pradesh and Himachal Pradesh which will increase the production capabilities of companies.2020 11 135.The impact of indirect tax is very much pronounced in case of the cement industry. IBS Hyderabad Cement Industry in India Page | 35 . Using regression analysis it was found that the demand for cement will be in tandem with the corresponding growth in GDP. 2. Indirect taxes. 4.As the country marches ahead in its bid to become a superpower.Construction chemicals like admixtures waterproofing compounds etc. Pricing strategy. 3.25 172. Complimentary goods.324 244.763 177. The recent growth trend of these products supports the above mentioned view. cement manufacturers invariably pass on the tax burden to the end consumers. can be considered as complimentary goods to cement .Cement price is determined by the oligopolistic market behavior and theory of collusion (Game theory) plays an important part in deciding the price. Owing to its inelastic demand. the increased spending on infrastructural development will be the be the primary driver for the growth of the industry. Findings 1. 3.

Increasing the ceiling on the mining area that can be held by a single company. So. awaiting amendments in the Parliament . What the government can facilitate? Mining and green field projects 1. The Planning Commission's Working Group on Cement Industry predicts cement production in India to grow at a rate of 10% during the next five year plan. 2. is just not adequate to deal with them. the scene is no different. 3. Cement enterprises are the favourite flavour of competition authorities around the world. . in tune with the requirements of the industry. In India. And they have further predicted that Growth of 9% per annum from FY2006-10 would result in cement production to around 190 mt in FY2010. Streamlining the limestone mine licensing policy in line with the consolidation within the industry and should encourage new capacity additions in the coastal districts . but it remains dysfunctional. it can be concluded that the market structure is oligopolistic in nature . Even though we have 59 cement players in India but we have observed that the top ten dominate the entire market and rest are dominant only in the local segment. From the demand perspective. This is one reason why we adopted a new Competition Act in 2002. the Monopolies and Restrictive Trade Practices (MRTP) Act. thus adversely affecting the market. But they have never been prosecuted. Simplifying and streamlining the process of leasing limestone mines and reduces the number of agencies involved in the process . cement demand in the medium term is expected to grow by around 9%. Conclusion and Recommendations We have observed that the demand for the cement looks robust and our view is further augmented by the fact the budgetary provisions done by the government for infrastructure spending is increasing. This is because they almost always collude as a cartel and fix prices. because our extant competition law.4.

Manufacture 1. Providing the identified plants with preferential mining leases. Incentives for mini cement plants for contract grinding 6. to whom cement manufacturers outsource the activities related to fuel management 6.: steel manufacturers) 5. (including nearness to the sea) and promoting exports from these plants 2. 3. SEZs. Lowering the import duties on coal used by cement plants on par with the reduced duties for coal imported by other industries (eg. Encouraging fuel management enterprises. statutory clearances and liberalise other statutory requirements which would otherwise add on their cost and competitiveness. in areas within 300km of the coastline to promote export oriented cement manufacture 4. Directing state governments to remove restrictions on choice of power source imposed on the cement manufacturers . Identifying the best cement plants (which compare favourably with global standards of operations) in the country based on agreed technical and operational parameters. Creating special cement export processing zones on the lines with other EPZs.4. Providing tax and other incentives for the same and exploring the possibilities of bringing in participation from the industry 7. Incentives for large cement plants putting up grinding units based on availability of blending material 7. Incentives for large cement plants sourcing the clinker from kilns set up near lime-stone mines in remote locations. Encouraging creation of additional grinding capacities near demand points IBS Hyderabad Cement Industry in India Page | 36 5.

eg. to enable competitive exports Logistics 1.8. Identifying major / minor ports that would be able to support the requirements of cement exports from major clusters 4. Removing the restrictions on constructing port based cement handling facilities Finance Sourcing inexpensive global funds and on-lending the same to the Indian cement manufacturers. Incentivising setting up of bulk handling facilities especially in coastal zones. Developing a suitable exit policy for enabling easy reorganisation of manufacturing capacity to increase the overall competitiveness of cement manufactured in India . Introducing policy initiatives to discourage the usage of packed cement bags for large infrastructure projects and by ready mix concrete plants. Promoting cement specific inland waterways and encouraging development of inland ports and handling facilities dedicated to cement 3. Waste heat regeneration etc IBS Hyderabad Cement Industry in India Page | 37 Grinding – Blended Cement Removing the restrictions on usage of blended cement (of acceptable quality) for large infrastructure projects Packing 1. thereby reducing the cost of finance for the Indian cement industry Consolidation 1.: Cogeneration. 2. Introducing policy measures to represent to the railways to endow a favoured preferential treatment to cement on par with coal and petroleum products 2. Incentivising the cement companies to source / develop the technology for power cost reduction.

Proactive investments in introduction of technology for flexible fuel operations 2. Proactive investments in pozzolona material handling facilities 2. Proactive development of independent bodies to manage the supply and distribution of pozzolona material on a cluster basis (on line with shared infrastructure for limestone and coal handling). Encouraging consolidation by providing access to the inexpensive funds from global sources to the large Indian players intending expansion / lateral consolidation within Indian industry How the industry can assist? Manufacture 1. Proactive creation of organized markets for alternate fuels for domestic / imported alternate fuels such as agricultural wastes. Packing Proactive investments in Bulk material handling and transport facilities to bring down the overall cost of cement . 3. IBS Hyderabad . material handling charges where as in developed countries cement nowadays primarily is sold in bulk and by this approach they are able to cut down the costs. especially no ash fuels such as natural gas . 4. Commitment to invest in efficiency improvement of the older plants in a timebound manner Grinding – Blended Cement 1.In India still the concept of selling cement in 50Kg bags prevail which increases the packing charges . Commitment for usage of alternate fuels. 5.IBS Hyderabad Cement Industry in India Page | 38 2. Outsourcing power generation to specialized utility companies. tyres etc.

― Modern Microeconomics ― . Proactive industry investments in feasible cement handling ports at identified centres 4. New Delhi. water and rail . Following measures can be suitable for the industry 1. ICFAI Centre for Management research.Cost incurred on logistics are very high and that is the reason why cement needs to be sold near to the factory . 18th edition . New Delhi. IBS Hyderabad Cement Industry in India Page | 40 line with Automotive Industry 3. 3. H L . ―Economics ― .Nordhaus .Cement Industry in India Page | 39 Logistics Cement is a highly capital incentive industry and majority of the players of this sector here operate on very low profit margin . To have grinding units away from the plants . S. Proactively pursuing common cluster based approach for railway siding and railway transport handling 2. Clinker can be transported to these grinding units which can be set up in neighboring states and the product can be marketed to a larger segment. across multi-modal transport facilities of road.‖Microeconomics ― . 2. 12th edition . Samuelson .Chand. Tata MacGraw Hill. Proactively pursuing common service providers (experts) for logistics handling. References 1. .Ahuja .

8.9685 1129. www. ―Statistics for Managers Using Microsoft Excel‖ .com. Appendix SUMMARY OUTPUT Regression Statistics Multiple R 0. Statistical report SRS .4th edition .cma.acclimited.4567625 . Stephan .in.4.9993936 Adjusted R Square 0. 5. IBS Hyderabad Cement Industry in India Page | 41 6. www. Registrar General of India Levine . www.9996968 R Square 0. 6.675842 Observations 11 ANOVA df SS MS F Significance F Regression 4 4516.914E-10 Residual 6 2. www. Prentice Hall of India.7405748 0. 7.2743 8.2421 Standard Error 0. New

89141 34.231907 9.2056233 0.3176131 1.999524 1.177994 PDN 0.5495009 0.8659083 -0.0783881 0.4865009 0.7869082 PRICE -0.177994 0.473E-07 0.5231773 0.356835 36.7091 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0138146 0.7109543 0.0% Intercept -56.4144167 0.9065846 A.3176131 1.177737 146.5484018 0.1785458 -146.7869082 0.177737 GDP IN PER 0.1876998 -0.3539216 1.7109543 0.8087695 0.4363047 1.89141 34.1762336 0.1722358 -0.Total 10 4519.1 Regression Analysis output .9065846 0.4363047 1.4542895 1.0% Upper 95.0399749 20.4144167 POP IN LACS 0.6753018 0.2056233 0.

6 Graph showing the rise in production as compared to GDP IBS Hyderabad Cement Industry in India Page | 44 A. 7 Graph showing the rise in price of cement as compared to GDP .2 Residual plot of GDP growth rate IBS Hyderabad Cement Industry in India Page | 42 A.3 Residual plot for price A.5 Residual plot for population IBS Hyderabad Cement Industry in India Page | 43 A.A.4 Residual plot for production A.