Supply Chain of Cement Industry in India

 Supply Chain of Cement Industry in India

 

Value chain

Supply chain of the industry primarily comprises four entities — raw material suppliers, cement manufacturers, distributors and end users. Generally, companies enter into agreements with respective state governments and coal companies for sourcing limestone, coal and power. Normally, net realisations for cement players (net of wholesale and retail dealers' margins, institutional sales and indirect taxes) amount to around 70-75 per cent of the maximum retail price (MRP).

Cement industry - Regional in nature

Cement is high volume and low value commodity; transporting it beyond a distance makes it unremunerative for end users, making it regional in nature. Cement consumption varies regionwise because the demand-supply balance, per capita income and level of industrial development differ in each state and hence, in each region.

In 2007-08, south (30 per cent) accounted for the largest share of consumption followed by North (20 per cent), West (20 per cent) and East (15 per cent), Centre (15 per cent).

Seasonality of demand and cyclicality of the industry

Demand declines during monsoons due to slowdown in construction activity, consequently, making cement demand seasonal. Monsoons extend from June to September across India (except in parts of Tamil Nadu and Kerala, where they last from November to January). Consequently, demand is lowest during the July-September quarter and highest during the January-March quarter. Demand peaks in March and is low in August.

In addition, the cement industry, like most capital-intensive commodity industries, is cyclical in nature, especially with respect to supply. Given the high gestation period of 24-30 months, there is a time lag between the capacity build-up and cement demand (approximately 24-30 months). Demand for cement is linked to economic growth; hence, when the economy is strong, demand increases. As a result, profitability of players increases, leading to capacity additions by existing players and entry of new players. However, since it takes around 2-2.5 years to build a cement plant, it is likely that demand could either decrease or stagnate, or capacity additions could exceed demand before completion of these capacities. This could lead to decrease in cement prices with the industry facing a downturn, and players reducing operating rates or shutting their plants.

Demand dynamics

Cement demand is closely related to growth in construction sector (a regression analysis of cement demand and investments in the construction sector shows a high correlation of 0.99 and moderate elasticity of 0.55). Consequently, cement demand has posted a healthy growth rate of around 8 per cent since 1997-98, propelled by the increased focus on infrastructure development and higher demand from housing sector and industrial projects.

Demand drivers

Cement demand is primarily derived from four segments namely housing (60-65 per cent), infrastructure (20-25 per cent), commercial construction (10-15 per cent) and industrial segments (5-10 per cent). Cement demand has grown at healthy pace of over 8.8 per cent compounded annual growth rate (CAGR) during last 5 years (2002-03 to 2007-08) on back of strong demand witnessed in its end user segments.

Housing

Housing accounts for a major portion of total cement demand, which is approximately 60-65 per cent of total cement consumption in India. Housing activity has remained upbeat during the past few years due to government's favourable housing policies like tax incentive, higher plan allocation etc. Growing middle class and rising income levels have significantly contributed towards growth in housing segment.

Three factors, namely, growth in housing stock, changes in average floor space area of the house and changes in budgets on housing drive growth in housing. Based on analysis of the above-mentioned drivers, CRISIL Research has estimated the total housing stock in 2008 to be around 146 million units. The current stock represents around 113 billion square feet of floor space area (FSA). On an average, annual demand addition to FSA is expected to be in the range of 4-6 per cent over the next 5 years.

Infrastructure      

Increased focus of government towards infrastructure development is expected to further push demand for cement sector as more and more infrastructure development is needed to sustain the gross domestic product (GDP) growth rate in high single digits. Allocation towards the development has increased over the years leading to higher demand for cement. 

Commercial construction

The commercial construction sector segment can be divided into four parts namely retail, office space, hotels and other civil structures like hospitals, multiplexes, schools etc. All the sectors are witnessing strong growth, which is directly translating into healthy cement demand.

In the past 3 years, organised retail has grown at a rate of 28 per cent on the back of huge under-penetration, large expansions by the existing retailers and many new entrants. Industry is expected to grow at a healthy rate of 19 per cent over the next 5 years.

In addition, with India emerging as an important back office destination, large global companies are setting up facilities here. Construction of commercial complexes and office spaces have increased in most large cities, such as Mumbai, National Capital Region (NCR), Chennai, Bengaluru, Pune and Hyderabad. In the IT and ITES space, as well, there is huge investment by domestic and global IT companies, which is contributing to growth in construction activity and thereby, increased offtake of cement.

Industrial investments

Indian economy is also witnessing strong growth, which has resulted in operating rates peaking up in industries like steel, aluminium, textiles, petrochemicals etc. These industries have announced expansion projects to take care of growing demand, which are at an advanced stage of implementation leading to higher intake of cement.

End users

The main buyers of cement are government, institutional buyers and retail buyers.

Government

The government obtains cement at very competitive prices due to its purchase process. It buys cement through two routes: direct tenders, or purchase through the Director General of Supplies and Disposals (DGSAND). The DGSAND receives cement rates from various cement companies, selects the vendor, and distributes it among government agencies registered with DGSAND. The government gets 60 per cent of its total requirement through direct tendering process, and the remaining 40 per cent through the DGSAND.

Institutional buyers (other than the government)

Institutional buyers such as builders buy cement from either cement companies or wholesalers. Bulk purchases are Rs 10-15 lower per bag than retail purchases. Generally, civil engineers and contractors decide on the variety and brand of cement to be purchased.

Retail buyers

Retail buyers include the housing segment. They buy from retailers as they have low requirements. Consequently, retail buyers have less pricing flexibility than institutional buyers, who make bulk purchases. In case of retail buyers, the mason decides the variety and brand of cement to be purchased.