Porter’s Five Force Analysis of Cement Industry

1. Threat of new entrant

Low
Barriers to entry-high
Cement industry is highly capital intensive market with long gestation
period. Capital is the biggest constraint which only big players will have
access to.
The market is experiencing the problem of overcapacity in recent times.
The existing players are also expanding their production capacity to meet
future demand.
Economies of scale are an important factor of this industry and this will
reduce the cost of cement which would favour big players like Birla
group or Ambuja. This will discourage new entrants.
Price plays an important factor. Companies which have a sustainable low
cost position will have a competitive edge. For example Ambuja has been
able to sustain a low cost position. Transporting cement over long
distances can prove to be uneconomical which acts as a constraint to enter
the cement industry.
Government regulation can be a barrier because government creates
barriers by limiting the number of licenses it sells for production. Cement
is energy intensive as well as highly polluting. Therefore entry to such a
market has to be highly regulated in the eyes of the government.
2. Rivalry among existing firms
High
Competition is intense with players expanding their reach. The industry is
a lot more consolidated than a couple of decades ago with a few large
players controlling the market share.
The domestic demand condition is likely to grow in the coming time as
per the latest report. Thus the existing players are expanding their
production capacity to meet future demand.
Many players in the industry are large scale players with huge capital
invested in setting up the production units. This factor raises exit barriers
for the companies. Hence, they stay in the industry and start aggressive
competition.
The differentiation in types of cement is marginal, hence switching cost
to customers is not so high. So firms compete intensely to gain market
share. Sometimes the problem of overcapacity comes into play, this leads
to price wars and competition intensifies.
3. The bargaining power of buyer
Low
In the cement industry the power of buyers is limited due to lack of
substitutes and the inelastic demand that the consumers have for the
product. Hence, they cannot exert much influence on the manufacturers.
Buyers are said to be powerful if they are highly concentrated and
purchase a large amount of product or if there is product standardisation.
Given the fact that the buyers in the cement market lack the
characteristics that give them power over producing firms, the bargaining
power of buyers is very low.
4. Bargaining power of supplier
High
In this industry suppliers exert a very high power. This is so because the
raw material forms a very large part in the manufacturing of cement.
Shortage in supply of raw materials can cripple the whole plant and can
lead to huge losses.
When the suppliers demand something the negotiations have to be
completed quickly and the result is more or less in favour of suppliers.
For example, if the coal suppliers stop supplying coal to the plant, it
cannot function and the production will come to a standstill. The supply
of coal gas to resume as quickly as possible. Cement manufacturers have
argued that price hikes in the industry are due to increase in the price of
both transportation and raw materials. This means that the suppliers are
powerful enough to force new prices on the industry.
Hence, the suppliers exert a great amount of influence in the decisions of
the cement manufacturing companies.
5. Threat of Substitute Product
Low
No product exists to date that can effectively substitute for cement. While
construction firms can use less cement in exchange for using other
materials that have qualities of cement, that substitution effect is
negligible on the market price of cement. An industry is only threatened
if another industry produces a similar product or if consumers of that
product can decrease the ratio of their use of that product and use another
product. Both of these choices are virtually non-existent to cement
consumers, hence the threat of substitutes is very low.
By-Savala Chaitanya
Roll no.-18BC513
Section- H