Cement Industry in India

An Analysis

-Prepared by H4G8 and H4G9 Great Lakes Institute of Management

Contents
Introduction  Industry Insight  Supply Scenario  Demand Scenario  Demand and Supply  Price Elasticity  Economies of Scale  Government Regulations  Future Trend 

Introduction 
Top 50 manufacturers worldwide account for 60% of total cement production  The Indian cement industry is the second largest in the world
Cement production across nations
Japan 3% Others 17% China 67%

US 4% India 9%

http://www.researchandmarkets.com/reportinfo.asp?report_id=1206384 http://www.ibef.org/industry/cement.aspx

Industry Insight
Installed capacity of 290 million tonnes per annum (MTPA) of with 140 companies  Major Indian players: Associated Cement Company Ltd (ACC) Grasim Industries Ltd Ambuja Cements Ltd J.K Cement Ltd Madras Cement Ltd  Highly freight-sensitive product, given that it is a highbulk, low- value commodity hence regional market  The industry experts project the sector to grow by 9 to 10% in the current scenario 

Supply Scenario 
     

Current supply of 250 million tonnes per annum 93% of the total capacity in the industry is based on modern and environment-friendly dry process technology Only 7% of the capacity is based on old wet and semi-dry process technology The industry's current capacity utilization rate is 82% Over-capacity issues in the cement industry are a worry factor Highly freight-sensitive product, given that it is a highbulk, low-value commodity hence regional market NR & ER, and SR & WR

Region wise Supply

Industry Concentration
2007 Concentration Ratio Herfindahl Index 57.36% 0.1066 2008 64.20% 0.101

Demand Scenario 
Cyclic

commodity industry with profit and return dependent on the demand cycle picture  Rapid increase in demand since 2003 resulting in constant growth in prices  Government projects providing a boost to the demand 
Golden Quardilateral Commonwealth games NREGA Indira Awas Yojana

Key Drivers of Growth 
     

Industrial Production Housing Sector Infrastructure Improvements Economic Boom Government Spendings Exports Private Investments

Consumption Trend
Year 200102 200203 200304 200405 200506 200607 200708 200809 200910 Domestic Consumption 99 108 114 123 136 149 164 178 209 Y-on-Y Growth (%) 9.7 8.7 5.8
100 250 200

150 Domestic Consumption Y-on-Y Growth (%)

8.1 10.1
50

9.9 10.1 8.4 12.5
0

Demand and Supply Trends

Regionwise Demand and Supply

Growth in Consumption (2005-09) (2005-

Parameters defining the Sector
Fuel Prices Coal Prices Two months inventory maintained  Electricity Consumes 5.5 bn units of electricity annually  Limestone Constitutes largest bulk of raw material  Plant location determined by the availability of mines  Transportation Bulk commodity involving huge freight cost  Railways and Shipping major players 

Pricing ² Cost Components
The major cost components in cement industry are  Energy costs  Freight costs  Capital  Labour  Raw material  Over the years, the share of energy costs have gone up marginally while that of freight costs has declined  Taxes  Other costs more or less stable. 

Price Elasticity
A 10% increase in energy price would lead to a 11% increase in capital input while at the same time energy use would decrease by 5.7%
Price Elasticity Price Elasticity Price Elasticity Price Elasticity

KK -0.252 KL 0.369 KE 1.085 KM -1.202

LK 0.662 LL -1.206 LE 0.507 LM 0.037

EK 0.567 EL 0.148 EE -0.568 EM -0.146

MK -0.415 ML 0.007 ME -0.097 MM 0.505

http://ies.lbl.gov/iespubs/41842.pdf

Elasticity of Substitution
Factor Material Energy complements Labor substitutes Capital complements

Energy

substitutes

substitutes

Labor

substitutes

Government Regulation
Period Of Restriction ²1952-1982  Both prices and distribution of output were strictly regulated by the government  Partial De-control ² from 1982-1989  2/3 Sales was for govt and Small house builders  Balance of 33.4% could be sold in the free open market to general consumers. A ceiling price was set for sales in the open market  Total De-control Post 1989  To gear it up to meet the challenges of free market competition and accelrate the growth, the system of freight pooling was abandoned and a subsidy scheme to ensure availability of cement at reasonable prices in remote. 

Other Regulations
In terms of Other Charges fall into two categories : 

Govt Taxes :  Freight Charges and VAT ( as of now its 12.5%)  Interest rate (Esp Housing rates)  Import Duty on Portland cements are on decline and have reduced to zero today  Taxes / duties on raw material like Coal, electricity etc  The Centre in December, had reduced the excise duty on cement by 4% to 8% 

FDI Regulation and Enrty  FDI has gradually incraesed over the years as of today 100% FDI is allowed in Indian Cement industry  Lafarge was the first entrant in india in 1999  Today, companies like Cimpor, Holcim Italcementi have joint venture with the Local indian companies

Economies of Scale
Price

ATC(y) AVC(y) AFC(y)

Quantity (y)

It is found that the industry is dominated by the Lshaped average cost curve  High Fixed cost and constant marginal cost  The industry is found to be still operating in the first half of the U-shaped average cost curve and thus cement firms have not yet reached their optimum size  Significant economies of scale exist only with respect to labour costs 

Future Trend
The trend in demand growth seen during the last five years is expected to continue over the medium term. Also, with Government targeting an over 8% GDP growth rate, cement demand should grow at 8-10% over the next few years and reach 300 m tonnes by 2012.

Bibilography
I. II. III. IV. V. VI. VII. VIII. ICRA : www.icra.in Berkley Laboratory: India·s Cement Industry: Productivity, Energy Efficiency and Carbon Emissions IBEF : www.ibef.org Business World : www.businessworld.co.in CSO: www.cso.com Economic Times: www.economictimes.indiatimes.com SCMS Journal of management CMIE Journal : Nov- Dec 2009

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