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Key Drivers Of The Indian Cement Industry
Cement is one of the most basic construction materials around. It is difficult to imagine the creation of any physical infrastructure without its use. Hence, if India has to grow at anything close to a double digit rate, the Indian cement industry is likely to play a pivotal role.
In this article, we will take a look at the key drivers of the Indian cement industry.
Fragmented markets clustered in regions
Transportation cost plays a major role in the location of Indian cement companies. The raw material (limestone) and the finished product (cement) are both bulky commodities. Cement companies try to minimize the cost of transportation between limestone deposits, manufacturing unit and cement markets. Hence, manufacturing units tend to cluster around places which are in close proximity to both deposits and markets. As a result, the Indian cement industry is fragmented into regional clusters. The cement manufacturers association (CMA) classifies the regions as Northern, Southern, Eastern, Central and Western India.
Given the regional nature of the Indian cement industry, competition is localized. Hence, even large players with sizeable market share across India have to compete with efficient single unit players in regional markets.
Volatile prices and margins
Cement consumption in India varies across regions because of the differences in per capita income and the level of industrial development. Hence, there is an imbalance in cement demand between the different regions. The supply of cement is also not uniform due to the unequal presence of limestone deposits around the country. While one region may experience a shortfall in cement supply, simultaneously another region may experience excess supply. Due to this supply-demand imbalance, cement prices and margins can vary across regions.
Cyclical nature
As is expected with most commodity industries, the cement industry follows a set business cycle. When the gap between demand and supply narrows, cement prices improve. Companies react by increasing their capital expenditure outlays with an eye on building capacities and capturing market shares. As capacities start piling up, oversupply creeps in. Cement prices fall. Companies reduce their capital expenditure outlays. This gradually narrows the gap between demand and supply, once again setting the business cycle in motion.
High energy costs
Cement manufacturing is an energy intensive process. Coal is used to fire kilns for converting limestone to clinker. Hence, energy constitutes a major share of total cement production costs. Some companies import coal, which has a higher calorific content and better consistency in quality compared to domestic coal. Some cement companies prefer captive power instead of local power grids to avoid the high power tariff and frequent power cuts.
Difficult to import
There are significant non-tariff barriers to cement imports. The Indian cement industry is highly cost competitive. Distribution of cement products in India is dominated by retailers rather than wholesalers. Moreover, cement is sold mostly in bags in India whereas imports are usually in bulk. In order to be able to distribute imported bulk cement, the importer needs to set up bulk storage and bagging facilities at the port of call and a distribution network to carry its product.
Taxes
Cement in India is a highly taxed commodity. Various taxes add up to a significant portion of the end-user price. In the latest union budget, the finance minister has imposed a 10% ad valorem duty and a specific duty of Rs 80 per ton for cement with retail price of up to Rs 190 per 50-kg bag. For cement with a retail price of over Rs 190 per bag, the excise duty has been revised to 10% ad valorem and Rs 160 per ton specific duty.
About the Author
Valuequity.com provides value investing research on Indian stocks for individual investors inspired by the methods of Warren Buffett, Ben Graham and Charles Munger.
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