The key drivers for Indian cement demand are real estate sector, infrastructure projects and industrial expansion projects. Among these, real estate sector is the key driver and accounted for almost 55 per cent in FY 07, according to Research and Markets report on the Indian Cement Industry 2008.
The cement industry has continued its growth trajectory over the past seven years. Domestic cement demand growth has surpassed the economic growth rate of the country for the past couple of years. The growth rate of cement demand over the past five years at 8.37 per cent was higher than the rate of growth of supply at 4.84 per cent as also the rate of growth of capacity addition during the same period. Demand for cement in the country is expected to continue its buoyant ride on the back of robust economic growth and infrastructure development in the country.
During the period FY03 – 07, capacity additions in the country (30.6Mt) were at a slower rate compared to demand growth leading to higher average capacity utilisation rates from 81.3 to 93.8 per cent during the same period. This has exerted pressure on average prices which have increased from INR156/bag in FY03 to INR216/bag in FY07. In December 2007, prices stood at INR245 - 250/bag.
Low capacity addition coupled with higher utilisation rate also led to increase in proportion of production of blended cements in product mix. Blended cement accounted for 68 per cent of product mix in FY07 as compared to 49 per cent in F 03.
Cement is a bulky commodity and cannot be easily transported over long distances making it a regional market place, with the nation being divided into five regions. Each region is characterised by its own demand-supply dynamics. The Southern region dominated the cement consumption at 44.5Mt in FY07, accounting for about 30 per cent of total domestic cement consumption. During FY03-07, Southern region has witnessed highest CAGR of cement demand growth at 10.4 per cent followed by Northern and Eastern regions at 8.9 and nine per cent, respectively.
Over the past five years, cost of cement production has grown at a CAGR of 8.4 per cent. Also, the producers have been able to pass on the hike in cost to consumers on the back of increased demand. Average realisations have increased from INR1880/t in FY03 to INR3133/t in FY07, at a CAGR of 13.6 per cent, which has been reflected in higher profit margins of the industry.
To reduce the cost of production, the industry has focused on captive power generation. Proportion of cement production through captive power route has increased over the years. Also, cement movement by rail has increased over the years.
Market share of top five players in the industry has increased from 42 per cent in FY02 to 56 per cent in FY 07. In FY07, Holcim group captured a leadership position with market share of 22.6 per cent followed by Aditya Vikram Birla group at 19.4 per cent.
Domestic Cement industry is highly insulated from global cement markets. Exports have been constant at about six per cent of total cement demand for past few years. With government intervention, making cement duty free, cement is being imported from neighbouring countries. However, due to logistics issues and lack of port handling capabilities, imports of cement will remain negligible and do not pose a threat to domestic industry.
Cement demand is expected to remain buoyant driven by boost in construction sector in the country. As per estimates, investment of US$25bn is required in urban housing, US$450bn will be required in infrastructure related projects and industrial expansion projects would witness investments of US$88 over the next five years.
We estimate domestic cement demand to grow at a CAGR of approximately 10 per cent for the next five years. The current tight demand - supply situation is expected to extend up to end of calendar year 2008 owing to delays in capacity expansion programmes by various companies. We expect prices to remain firm till the end of CY2008 due to tight demand - supply situation and increase in input costs. Thereafter as new capacities come in, we may witness a softening in prices in some regions.