Planned infrastructure improvements could mean growth of India’s low per capita consumption of cement — and other commodities 

The ranking of countries on the basis of capacity owned in a particular industry and production thereof could be misleading, writes Kunal Bose. This is as much true of steel and aluminium as of binding material cement. The way China ferociously went on building capacity in the past two decades, which mercifully has now stopped, means it has more than half the share of world production in a good number of commodities. Like in cement, China alone accounts for close to 60% of global annual output of over 3.6bn tonnes. It will be instructive to show how India, the world’s second-largest producer of cement, stands in comparison to China. According industry data, India has installed capacity of 372mt (million tonnes) of cement. But consumption being 271mt in 2015, the Indian industry is nursing idle capacity of over 100mt. India has 7% share of global cement production.

In steel in particular and also in aluminium, high levels of Chinese exports resulting from sustained big production in the face of fall in domestic demand have invited trade action, including invocation of anti-dumping measures by nations injured by imports originating in China. Cement, however, is an exception where despite production well in excess of 2bn tonnes, China has managed to use the whole amount itself for construction, infrastructure and housing projects. As a result, per capita use of cement in China could be around 1,700kg. India where infrastructure deficit remains monumental, except in a handful of states and housing for all remains a major concern for the government, has in comparison to its neighbour a rather low per capita cement use of 201kg. In fact, this compares very poorly with the world average per capita of 543kg.

An official of the Confederation of Indian Industry says:“the Indian per capita cement use is disappointing considering the fact the economy in 2015–-16 grew at 7.6% and the forecast for GDP growth in the current year is 7.8%. Forget about praises heaped upon India as the brightest growth spot in the world by the IMF, the World Bank and the rest, a rapidly developing country should be using cement in multiples of what is consumed here now. There are quite a few examples of rapidly developing economies having per capita cement consumption much higher than the world average. Singapore at its infrastructure and house building development phase spanning many years in the past recorded cement per capita use of more  han 1,000kg.” But then India’s per capita steel use at about 60kg is nearly one-fourth the world average. As for aluminium, per capita consumption in India at 1.3kg compares poorly with the world average of 7.4kg.

This, however, shows given the government and private sector being earnest in pushing through infrastructure and housing projects, rapid rises in cement consumption growth in India remains a distinct possibility. According to industry officials, the immediate challenge is to bring the idle capacity of 100mt into production stream by generating demand for the binding material. The 2016–17 (April to March) national budget holds high hopes for the industry as it promises to activate the “languishing” infrastructure projects and launch highly ambitious ones. Asked by DCI to list the budget proposals whose implementation will give a major boost to cement consumption, an industry official said:“What we find encouraging is government development focus is back on strengthening urban and rural infrastructure and creating affordable shelter for the masses. All such work will be cement- and steel-intensive.” A government push of this kind is needed as India’s cement consumption growth of 2% in 2015 was the slowest in a decade. The slow demand growth in a situation of high surplus capacity made the market highly competitive with prices remaining under pressure.

For the cement industry, the exciting budgetary announcements are: (i) likely approval for building nearly 10,000km of national highways in the current financial year. Earlier, the government decided for running of smooth heavy traffic and longevity of surface, national highways will be built with cement concrete only. (ii) New Delhi is trying to convince the state governments that like the centre they should also opt for cement concrete construction of all state highways. Hopefully, the nearly 50,000km of state highways to be taken up for up-gradation will be made of cement concrete. (iii) Mainland India’s coastline is 6,100km. To boost the country’s foreign and coastal trade, the budget has proposed the building of many greenfield ports both on the east and west coast. At the same time, sufficient investments are proposed for modernization and capacity expansion of operating ports. In both areas, the private sector will have a major role. (iv) Fast tracking of long- languishing 89 irrigation projects that will water over 8m hectares.

Ahead of the budget, the government took a decision to build 60 million houses under the ‘housing for all by 2022’ and create 100 smart cities across the country. In further cement demand creation moves, the government is ensuring that all roads to be built in smart cities will be with cement. ACC, one of India’s leading cement producers and an ultimate subsidiary of LafargeHolcim of Switzerland says cement “consumption could pick up well beyond 6% if infrastructure development and ambitious projects such as ‘Make in India’, smart cities mission... are accelerated. Housing demand stimulation is linked to progressive reduction in interest rates and greater supply of affordable dwellings.”

Cement Manufacturers Association (CMA) says cement imports are the last thing that the country needs when the local industry is nursing much idle capacity. For curbing imports, CMA wants high tariff barriers as they now obtain for steel. At the same time, CMA recommends certain government moves to enable particularly the factories not far from the coast to export cement and clinker. The suggested steps are: (i) Royalty paid on limestone is to be neutralized to facilitate cement sales in the world market. This will ensure that exports do not carry the burden of domestic levies. (ii) Duty drawback needs enhancement to 3%. (iii) For the purpose of exports, cement and clinker should be so classified as to invite lower rail freight. (iv) Investments made for developing private jetties and ports for cement exports that would also help in decongesting national ports should be extended higher rates of depreciation.

Whatever the industry demands from the government, the fact is less than 5% of global cement output finds its way into seaborne trade. That India makes cement of global standards of any number of varieties as its new generation factories are equipped with best machines will not automatically boost exports unless the government creates the ‘ideal condition’. Many developing and emerging nations building own cement capacity is also restricting seaborne trade in the commodity, which should preferably be produced close to consumption point. “Export certainly is not the answer to 100mt capacity lying idle. But if the government acts in the way CMA has recommended, then India like in the past could be a regular exporter of 10mt or so,” says an industry official.

Cement remains a highly taxed industry in India. Central and state level taxes account for 60% of ex-factory cement prices. CMA wants government levies to be reduced by up to 25% to leave more money in the hands of cement companies for periodic modernization and capacity creation. Capacity consolidation continues to make progress in India. Under pressure from banks to pare their debts, many groups, which in the past diversified into cement, are selling plants for cash. Infrastructure and power group Jaypee has sold earlier this year 22.4mt cement capacity to Ultratech Cement for nearly $2.49 making it the largest deal in the cement sector. Birla Corporation purchased recently 5.5mt capacity from Anil Ambani-owned Reliance Infrastructure at a valuation of $140 a tonne. The acquired plants are in Madhya Pradesh and Uttar Pradesh. The transaction has boosted Birla Corp’s capacity to 15.5mt.

Following the global merger of Holcim and Lafarge, the Indian regulator has asked the merged entity to dispose of assets totalling 11mt. LafargeHolcim Chief Executive Officer Eric Olsen said the company was “attracting strong interest for capacity it’s forced to sell in India” following a merger that created the world’s largest cement maker. Olsen told Bloomberg: “We see a wide range of interest, both financial and strategic. We expect to get a very attractive price overall.” In the coming days more capacity consolidation will happen since a good number of cement companies have capacity of up to 10mt. Most such groups remain takeover targets.

Every major cement group in the world is extremely bullish about the future of the industry in India. The reason is the country must continue to invest heavily in infrastructure development for any number of years to achieve sustainable GDP growth of close to 10% a year. According to the Planning Commission study group, India will need cement manufacturing capacity of over 1,035mt by 2027 to meet the demand emerging from infrastructure and housing sectors. India has the two principal resources, namely, limestone and coal in great abundance to support large new capacity development. According to Indian Bureau of Mines, the country has cement grade limestone reserves of nearly 90bn tonnes. More will continue to be added to reserves through conversion of resources by way of further exploration. And India’s coal reserves are over 300bn tonnes. Cement factories have also started using steel blast furnace slag and fly ash from power plants in growing quantities. 

Construction halt leads to collapse of cement sales in Brazil  

Cement sales collapsed in Brazil last year, and further falls are expected in 2016, writes Patrick Knight.

With the sole exception of market pulp, which has benefited from being particularly competitive at a time when numerous high- cost mills in other parts of the world are closing down, demand for all the other commodities produced in Brazil has fallen sharply in the past couple of years, and none more dramatically than cement.

With construction of all kinds at a virtual standstill, 10%, or 6.4mt (million tonnes) less cement was sold in Brazil last year than the 70.9mt consumed there in 2014. Demand is now falling month after month, it is expected that a further 10–12% less cement will be needed this year, and
that annual sales could soon fall to less than the 60mt of a decade ago. With cement being such a bulky commodity, Brazil exports very little, apart from small quantities to neighbours such as Paraguay, Bolivia and Uruguay and imports are almost insignificant as well.

For the ten years up to 2014, demand for cement increased by an average of 10% a year, and the country’s 95 cement making plants had increased capacity to about 85mt. The expectation was that demand would reach 100mt in the near future.

An estimated 100,000 completed homes stand unsold at the moment, with new starts few and far between, with unemployment shooting up. A large proportion of consumers are having difficulty keeping up with debt repayments, with the result that civil construction, which uses 75% of all the cement sold in Brazil, is almost at a standstill. When the economic downturn began a couple of years ago, the government’s plan was that state spending on infrastructure would fill the gap, and that long-postponed road, rail and port building programmes would be speeded up. But with tax revenues falling fast, both the federal and local governments are having difficulty paying salaries nd wages, so there is little or nothing left for investment.

The high cost of transport in Brazil has meant that the cost of getting the soya, maize and sugar produced in areas far from the sea, to ports, eats into profits. Because of this, the leading grain trading companies had prepared plans for investing in new railways. But with world soya and maize prices down sharply in the past few years and sugar prices still to rise significantly, the trading companies have also been forced to shelve their plans as well.

Numerous foreign companies are taking advantage of the fact that many Brazilian companies are facing financial difficulties, to buy them up. It is hoped that some of the newcomers may have the funds to make the investments which are badly needed if some Brazilian goods and commodities are to remain competitive in world markets.

Most of the 22 companies which own cement plants in Brazil, have slowed expansion plans or shut high cost plants. Votorantim, the largest, and which owns 26 plants in 14 of Brazil’s 26 states, has shelved expansion plans at several plants and closed four. The number two ‘Intercement’ company, in which the Odebrecht construction company has a large shareholding, has also cut back. The fall in demand has affected the entire country, including the North East region, which had long been Brazil’s poorest region, but which has been catching up fast in the past few years, as many manufacturing companies in labour-intensive industries, such as textiles, footwear, and even car manufacturing have re-located plants there, encouraging the cement industry to build new plants there.

About 10% of all the cement used in Brazil is bought by the owners of small houses, who build them themselves, or make improvements to accommodate more family members as time passes. In addition, it is estimated that Brazil has a housing deficit of about 5.5 million homes, while much needs to be spent on improving main drainage. But with unemployment rising, and wages being squeezed, the bottom segment of the market has been hit even harder than average.

The Brazilian economy is expected to shrink by up to 3% this year, on top of the 2.5% fall in 2015. With no end in sight to the current political deadlock, which is preventing the strenuous action which is needed to get finances in order being taken, it seems unlikely that the situation of the cement industry will improve much for another year or two yet. The only bright spot is that following the 50% fall in the value of the Brazilian currency in the past 18 months, the cost of imported goods has fallen by substantially more than the earnings from exports have risen. The result has been that for the first time in a decade, Brazil’s trade has generating a surplus in the past couple of years.