Cement Industry

Profit Potential: Moderate

1. Rivalry Among Existing Firms (High)

Market Growth Rate: The consumption of cement has increased due to factors like
growing urbanization, real estate business and large-scale development projects of the
government. Moreover, an increasing number of migrants traveling from rural areas to
the big cities are boosting real estate business while the rural individual homebuilders are
fueling consumption of cement. As a result, the cement market grew at approximately
11.5% CAGR over the last few years. Cement sales in 2018 was 33 million tons, from 29
million tons in 2017 (12% rise). The governing body of BCMA as well as the
manufacturers are very much optimistic about the future of this industry. So, the market
growth rate is high. 

Market Structure: The cement industry of Bangladesh can be said to have a perfect
competition where there are about 76 registered cement manufacturing companies and of
them, 42 large- and small-scale companies are producing cement as of now (according to
BCMA). Among the existing 42 market players, the cement industry is dominated by
only ten companies including two multinationals, holding around 80% of the total market
share. Among the top 10 cement market players in Bangladesh, 8 are local and 2 are
multinational. Multinational cement companies are facing intense competition from local
companies which are gaining more business through lower pricing, superior products
offerings, extensive branding and better relationship marketing. Due to the oligopolistic
nature of the market, the competition in this sector can be said to be intense.

Degree of differentiation and switching cost: Cement products cannot be much

differentiated since these products serve almost the same need. The special varieties of
cement are not being produced locally, rather they are being imported. Since the products
lack differentiation, the switching cost for the consumers is not very high. Also, the
government is one of the major customers of this industry and the government chooses
the company that offers the products at the lowest possible price. So, industry rivalry is
high.

Ratio of fixed to variable cost: The ratio of fixed to variable cost in this industry is very
high. The amount of capital required to establish a plant for producing cement is huge.
Again, factors like gas price hike and updated taxation rules, the cost of raw materials
and the overall production cost is getting higher but at the same time, the players are not
being able to charge a higher price in contrast to the higher production cost due to the
immense competition in the market. So, industry rivalry can be said to be high.

Excess capacity and exit barrier: In the recent years, cement manufacturers have been
increasing their production significantly anticipating huge demand in the industry given
soaring income level, outstanding economic growth, and the number of mega-projects
being undertaken. However, the production level is higher than the annual domestic
demand of the country. In FY 2018-19, effective capacity of the industry is almost 58
million metric ton (which is approximately 80% of installed capacity), whereas annual
demand is around 31 million metric ton, so excess capacity exists. So, currently the
players are trying to sell their products at the lowest possible price, keeping their profit
margin lower. Besides, the large capital investment made in the plants creates an exit
barrier for the players in this industry. So, industry rivalry is high. 

2. Threat of New Entrants (Low) - 

Economies of Scale: The industry is highly capital intensive as it requires investment in
plant and machinery. So, fixed cost as a percentage of total costs (operating leverage) is
very high. Aligning with the increasing demand, fixed cost per unit product can be
reduced. So, there is a scope of economies of scale in the industry for the existing players
whose products have high demand in the market.

First Mover Advantage: Cement industry has lower demand compared to its supply.
The product quality is very hard to determine without in-depth high expense tests. So,
most of the consumers tend to trust the old brands as they have created a brand
recognition for themselves. Consumers perceive those brands of higher quality and
reliability. So, older companies enjoy some sort of first mover advantage.

Access to Channels of Distribution and Relationships: Most of the distributors of

cement don’t distribute a lot of brands. They only distribute products of the brands that
have a good relationship with them and give them lucrative incentives. So an existing
company can acquire a distributor through a long-time relationship and by providing him
lucrative incentives, and prevent him from distributing other brands. This creates a barrier
for the new brands to access the distribution channels

Moreover, the majority of the customers in the industry are government and corporate
customers. These people don’t change their cement supplier frequently due to the
informal relationship and costs associated with the change of supplier. As a result it is
very tough for a new brand to create relationships with the customers  
Legal Barriers: To operate in the cement industry a company needs a business license
which is moderately easy to get. But they also require environmental permissions which
are tough to acquire. So the industry has moderate legal barriers. 

3. Threat of Substitute Products (Low)

Relative Price and Performance of Substitute Products: Compressed Stabilized Earth
Block (CSEB), also generally known as “building blocks” are one of the most common
substitutes to cement. There are different types of CSEBs: interlocking, sand cement
hollow, thermal block etc. Blocks are much cheaper to produce than burnt bricks and
require less cement. Mineral admixtures are also seen as a viable substitute to cement.
Materials with mineral admixtures are usually much stronger than cement. Some other
alternatives to cement are Silica fume, limestone fines and pulverized fuel ash. However,
these substitutes are not very popular yet and hence they cant be considered proper
substitutes of cement yet.

Customers’ willingness to Substitute: Customers are willing to substitute if the prices

are decent and the substitute products perform better than the original ones. In this case,
all of cement’s substitutes are very less known and not properly tested to be a proper
substitute for cement in all cases. More importantly, the substitute products’ industry are
not yet organized to support the country as a substitute of cement.

Actual Profitability - Moderate

4. Bargaining Power of Buyers (Moderate)

Price Sensitivity: Even though there is a considerable number of options available for
the buyers with around 10 top cement manufacturers, they are differentiated in three main
categories of strength classes: ordinary, high and very high. This differentiation presents
a level of variation in both quality and price for the buyers. Price is a key factor but not
the only factor that determines customer choice as brand name and quality is also an
important factor. Demand is inelastic as demand exists at all price points. 

Furthermore, when an establishment is constructed with a specific cement, the same

cement is recommended to be required for further construction hence, customers
automatically tend to be brand loyal as switching costs are too high and impractical. Price
variations are seen mainly due to seasonality with demand peaking during winter and
prices increasing due to increasing transportation costs as we go towards rural areas.  So,
price sensitivity in the cement industry is moderate. 

Buyer Size and Resource: Buyers in this industry can be categorized into three different
types: individual home builders, commercial real estate developers and public sector. The
commercial real estate developers and public sector with mega projects take up around
70% of the total consumption of cement in Bangladesh and enjoy some bargaining power
and hence, the individual retail customers of cement, who do not buy in bulk to take up a
considerable proportion of a cement company business, have little or no bargaining
power.

5. Bargaining Power of Suppliers (moderate)

Substitutes: 90% of the clinker, the main raw material for cement, is imported from
Vietnam. There aren’t many feasible substitutes for clinker apart from India and Hong
Kong. Bangladesh has scarcity of mineral resources like limestone and is not able to meet
the demand for clinker. However, there are many small and medium enterprises in the
limestone industry in Bangladesh who can supply to the cement manufacturing firms.

Nature of supplier and buyer: The suppliers are all in different countries abroad.
Vietnam is the prime supplier as 90% of the prime material for cement, clinker, is
imported from Vietnam. So, the buyers are highly dependent upon suppliers from
Vietnam. The suppliers can charge higher prices based on their procurement prices and
advantages, and also based on foreign exchange movement. The cement industry firms
don’t have strong power to bargain against those, as their switching options are limited
and contingent upon foreign freight costs and foreign exchange movement. So, suppliers
get a moderate bargaining power here.