‘Capacity additions may be delayed’

‘Capacity additions may be delayed’
Published: 02 June 2008

Stocks of Indian cement companies have been southward bound on sedate numbers and concerns on regulatory intervention on prices. Will the sector also enter a surplus phase? Mr Sumit Banerjee, Managing Director, ACC, shares the opinion that some of the fresh capacities may be delayed due to various setbacks, though the sector will see a surplus in the years to 2012. In an interview with Business Line, Mr Banerjee shares his views about the out look for the cement industry and the future plans of the cement giant.

Excerpts from the interview:

There are huge capacity additions announced by the Indian cement industry. Do you see these being commissioned on time? And if that happens, do you foresee a surplus in the market?

In our view, some of the capacities may not be commissioned due to various bottlenecks, such as delays in supply of equipment and in receiving clearances and approvals. We estimate that the tonnages that are likely to materialise are as follows:

By calendar year (CY) 2008 — 32Mt, making fortotal year-end capacity of 206Mt.
By CY 09 — 80Mt, making for total year-end capacity of 254Mt.
By CY 10 — 111Mt, making for total year-end capacity of 285Mt.

However, we see a surplus in the market from next calendar year, and this surplus may well increase year after year till at least 2012. Cement demand is expected to grow at a compounded annual growth rate (CAGR) of 11.0 per cent until 2012, whilst on the supply side the growth will be at a faster pace, leading to a supply-demand mismatch.

ACC has announced that its prices will be on hold for three months. Given that raw material prices are in an uptrend, what steps has ACC taken to manage margins? How will it tackle the rising fuel prices (coal) and operating expenses? We are continuously pursuing ways of improving productivity and operating efficiency. We are working at peak capacity utilisation. Logistics and distribution is another area where we make continuous effort to minimise costs.

If input costs and taxes rise, we need to enhance our selling price, but if there is any restraint on selling price, such as what we are facing now, our margins will inevitably be squeezed.

What proportion of coal requirements are imported annually? Have you initiated any moves for alternative sourcing of inputs and coal?

At present, 67 per cent of our coal requirement is met through the standing linkage. We purchase the remainder 18 per cent in the domestic open market, while 15 per cent is imported. Coal is a matter of great concern. There is little we can do to control cost increases other than seeking to reduce coal consumption. We have started using Pet coke in a few of our plants. We are also looking at non-fossil fuels and renewable energy sources. You may be aware that we have an ambitious programme to search for alternative fuels and raw materials. We are promoting waste management services through co-processing services in a big way. We already have a wind farm of 9 MW operational in Tamil Nadu and are looking at options in Rajasthan.

Currently, overall cement supply is seen to be almost in line with demand. ACC’s major capacity addition (3 mtpa at Chanda) is expected to come on-stream only in CY 10. What do you expect the supply scenario to be at the time of the commissioning, given that there are industry-wide additions around that time? Will the market be in surplus by then?

By the time the Chanda expansion is completed, we do expect the market to be in a surplus situation overall. However, there are going to be regional imbalances and we envisage no problems in selling our extra tonnage at Chanda as it will materialise in two stages. We plan to market the extra volume mainly in the home market of Maharashtra while the balance quantity may be sold in other markets.  

What is the potential for Ready Mix Contrete (RMC) in the Indian market? Is ACC at an advantage in this market compared to competitors?

The Ready Mix Concrete industry is growing at a fast pace, driven by demand from large constructions in the metros and other cities. High-rise buildings and urban infrastructure projects prefer ready mix concrete and the trend is increasing to include smaller projects as well. ACC is among the largest in this business. We plan to grow in this segment. Our ready mix concrete business has now been reorganised into a separate wholly-owned subsidiary called ACC Concrete Ltd. We have an advantage in this business since we have a well-established network in the country. In fact, we were the ones to introduce distribution of ready mix concrete on a commercial basis in India.

What is the price and demand-supply outlook for cement in the coming quarters, especially in the key Northern and Eastern markets?

We expect the demand in the coming quarters to be good. In the North/Central regions, we expect growth in demand during 2008 over that in 2007 to be healthy at 9 per cent. In the East, we see the demand in 2008 to grow by 7.5 per cent over that in 2007. In the North/Central regions, on the supply side, we see some mismatch due to the recently commissioned capacities, increase in imports through the Wagah border, etc, which could lead to some price pressure in select markets. In the East, due to insignificant increase in supply side, we expect prices to be steady, barring seasonal fluctuations.

Coal is a matter of concern. We are looking at non-fossil fuels and renewable energy sources.