Evolution of the cement industry in India

Evolution of the cement industry 

 

The cement industry is one of the core sectors for growth of the country. Cement is one of the most basic construction materials; hence, an essential item for the country's infrastructure development.

Cement production commenced in India as early as 1914. The first cement unit was set up at Porbandar in 1914 with a capacity of 1,000 tonnes per annum. Installed capacity in the country, as of March 2009, was 217.8 million tonnes.

Growth of the cement industry, however, has been uneven (with most of the capacity additions happening only during the last decade). Government regulations stunted the growth of this industry. In the past, government regulated the industry with both licensing, price and distribution controls. Removal of these controls resulted in rapid progress in terms of new capacity creation and higher production. India moved from a cement scarcity situation to a surplus position. Currently, India ranks as the second largest producer of cement in the world.

Evolution of the cement industry in India can be broadly classified into three periods — the period up to partial decontrol (up to 1982), the period up to total decontrol (1982-89) and the period after total decontrol (after 1989 to date).

The following table summarises events in the cement industry:

Table 1: Events during the period of government control

Period of govt control	Events
1942	FOR (free on rail) destination price of cement fixed on a cost plus basis.
1946-1952	Cost of production of ACC used as a basis for fixing cement prices. Freight equalisation system introduced simultaneously.
1958	Introduction of three-tier retention price scheme, whereby retention prices are decided based on the age of the plant and technology employed.
Jan-66	Price and distribution controls lifted.
Jan-68	Price and distribution controls reimposed.
Apr 1969 - May 1979	Period of single price regime; total distibution control.
	Cement industry grew at around 4.0 per cent during this period as against the high growth rates in the past.
Sep-77	Government guarantees 12 per cent post-tax return on the net worth of new cement companies.
Source: CRISIL Research

Table 2: Events during the period of partial decontrol

Period of partial control	Events
Feb-82	Companies allowed to sell 33 per cent of their production in the open market, while price and distribution controls enforced for the remaining production
1985-86	Proportion of cement for free market sale increased to 50 per cent.
Source: CRISIL Research

Table 3: Events post decontrol

Period of decontrol	Events
Mar-89	Price and distribution controls removed completely.
Jul-91	Industrial licensing abolished for new capacities
1998	SC ruling allowing to use a material other than jute for packing
Apr-08	Government banned cement exports
Jun-08	Ban on exports partially lifted and exports from Gujarat ports are allowed
Dec-08	Ban on exports revoked completely and DEPB advantage granted to players
Source: CRISIL Research Cement sector has witnessed an impressive run over the past few years, with an improvement seen across key operational parameters such as operating rates, prices and profitability. Housing sector is the single largest consumer of cement in India. Over the last 5 years, India has witnessed a real estate boom, especially in the metros and tier I cities. This has been the primary driver for cement demand, which has grown at a healthy CAGR of 9.3 per cent over the past 5 years. Going forward, CRISIL Research expects cement demand growth from housing segment to slow down. However, this will be offset to an extent by an increase in cement consumption from the infrastructure sector. In addition, an increase in independent housing projects in semi-urban and rural areas will provide support to cement demand. As a result, we expect cement demand to register a CAGR of 7.8 per cent over the next 5 years.  Within infrastructure, we believe that road projects will be a key driver for cement demand. Cement consumption in road projects will grow significantly on account of an increase in expenditure on road projects as well as an increase in cement intensity for the construction of roads. Increase in use of paver blocks, construction of flyovers and bridges, and increasing proportion of concrete roads as compared to bituminous roads will lead to an increase in cement intensity in roads construction. While cement demand growth is expected to slow down marginally, we expect significant capacity additions in future (around 90 million tonnes of cement capacity to be added over the next 5 years). Majority of the capacity additions are expected in south India (around 45 per cent of total capacity additions). Unlike previous capex cycles where a number of new companies set up cement capacities, this time around majority of the capacity additions will be by existing cement players. Due to significant capacity additions over the next 2 years, we expect cement operating rates to fall form 88 per cent in 2008-09 and bottom out at 77 per cent in 2010-11 before recovering to 87 per cent 2013-14. In terms of regions, south and east will face the maximum decline in operating rates; they are expected fall below 75 per cent. For the other regions - north, west and central, the decline in operating rates will be lower. Due to a fall in operating rates, we expect cement prices to fall by around 5 per cent in 2009-10 and 8 per cent in 2010-11. As a result, player profitability will be negatively impacted and we expect a 50-100 bps dip in operating margins in 2009-10 and 500-700 bps dip in 2010-11. A decline in power & fuel and freight cost will help arrest a decline in operating profits in 2009-10 to an extent.