Global giants keen to get a slice of the Indian cement pie

Why are global cement giants like Holcim, Lafarge and Heidelberg already in India staying busy in identifying capacity expansion opportunities both by way of acquisition of operating factories and building greenfield units? asks Kunal Bose. Or for that matter the ones which are not already present here so keen to have a slice of the Indian cement market? Indian cement use has the potential to grow at a rate next only to China, which has a share of nearly 60% of the most basic of building materials. Industry officials say Chinese producers like CNBM and Anhui Conch, both sharing space with world cement giants, are likely to take a shot at India, especially as debt-driven growth in their own country is slowing on official direction. Cement being a low-cost heavy product, it does lend itself to only short haul sea trade. This is why, even with greater domination of the global cement industry than steel where China has a share of about half the production, the country is not involving itself with either the European Union or the US.

Cement, unlike steel or aluminium, is no good for any long distance transfer from factories to distant consumption points. Heavy weight and low value stand in the way of cement shipments over long distances. The point is well illustrated by the fact that, even while capacity utilization by the Indian cement industry is well below 70%, it is able to export just about 3% of production and then only of clinker, an intermediate material for cement making. While India’s exports are restricted to neighbouring countries like Sri Lanka and Bangladesh, it at the same time receives cement from Pakistan. Or take the case of Singapore where per capita cement consumption is among the highest in the world. Since its banning of units engaged in clinker grinding on environmental grounds, the city state Singapore is importing cement from Malaysia and other countries close by through bulk cement terminals. Only by being physically present in India could Chinese cement makers be part of a market with promise of growing at a compound annual rate of between 8.96% and close to 10%. After all, besides its own rosy projection of outlook, global agencies, including the International Monetary Fund and World Bank, are saying India is all ready to overtake China’s gross domestic product growth rate.

Demand for cement depends on housing activity, infrastructure development and commercial and industrial construction. Growth rates in cement use will necessarily be higher in emerging economies like China, India and Brazil than in countries with virtual saturation of infrastructure development. India’s appeal is not only in sustainable high demand growth potential but also in abundant availability of limestone and coal deposits. Moreover India, being the world’s third-largest producer of steel and generating huge volumes of coal-fired electricity, its supply of supplementary cementitious materials (CMCs) slag and fly ash is steadily rising. Most concrete produced anywhere in the world has in it one or both these materials. Holcim subsidiary in India ACC uses both slag and fly ash besides the principal raw material limestone.

The National Council for Cement and Building Materials estimates Indian reserves of cement grade limestone at 123,829.64mt (million tonnes) of which 31,758.72mt are proved 39,028 for 56mt probable and 53,042.35mt possible. What helps in building new cement capacity is continuous growth in reserves on the back of intensive prospecting and exploration leading to discovery of geological occurrences of limestone. Based on exploration carried out by Geological Survey of India and other official agencies up to a maximum depth of 1,200 metres, the country has non-coking coal resources of 266bn tonnes. Resources may be available in plenty, but getting allocation of new coal and limestone deposits remains caught in a tangled web of bureaucracy.

In India, cement manufacturing units are given ‘linkages’ to government-owned Coal India Limited (CIL) or its subsidiaries like Mahanadi Coalfields, under which an agreed amount of fuel is to be supplied on long-term basis. In the last few years, in most cases supplies to cement factories as also to steel and aluminium groups fell short of the contractual amount, forcing all of them to import coal or buy the fuel participating in CIL-conducted auctions.
Coal procurement outside ‘linkage’ arrangement entails extra expenditure raising fuel bills. ACC, which happens to be among the industry’s best-performing
groups, power and fuel bill constitutes 21% of total income from operations.
The power bill of the company would have been more but for “steadily improving operating efficiencies of kiln and captive power plants and benefits
derived from waste heat recovery system.” 

To make a success of prime minister Narendra Modi’s ‘Make in India’ programme, it is absolutely essential to make substantial improvement in coal supplies to all industries, including cement. Fortunately, New Delhi wakened up to the situation has asked CIL to be more responsive to consumer demands and told the railways, again government-owned, to make available larger numbers of wagon rakes for quick evacuation of coal from mines to consumption points across the country. Despite the country owning the third- largest coal resources in the world, its coal imports jumped 33.5% to 242.4mt in 2014 and this year imports could further rise to 260mt. An official of the Cement Manufacturers Association says “assurances of much-improved supplies of coal from CIL and our member units securing coal blocks will create ideal conditions for growing cement capacity from present 366mt to 480mt by 2017.”

India’s per capita consumption of cement at 190kg compares poorly with China’s 1,581kg, South Korea’s 911kg and Brazil 330kg. High per capita consumption of Saudi Arabian kind of 1,700kg is indicative of actual investment made in infrastructure development and urbanization. In fact, the higher the per capita GDP, more is the per capita use of cement in an emerging nation. Per capita use of cementing material in countries like the US, Germany and Japan with highly developed infrastructure, therefore, ranges from 250kg to 350kg. India’s 12th five-year plan covering the period 2012–17 proposed a big investment of $1 trillion in infrastructure development. Unfortunately, since the previous federal government headed by Dr Manmohan Singh became increasingly weak, most big projects requiring a host of sanctions remained stalled. Modi government is working overtime to get these projects going. Moreover, the decision to create 100 smart cities across the country will create substantial new demand for cement.

If forecasts of 7.5% GDP growth in 2015/16 come true, and also if the country’s central bank reduces interest rates encouraged by falls in price inflation, then house development will get a boost to the delight of cement industry nursing much idle capacity. This is because housing sector remains the biggest  demand driver accounting for 67% of total Indian cement consumption. Infrastructure with a share of 13% will claim a much bigger share of cement cake once work starts on much delayed projects. Commercial construction and industrial construction respectively have 11% and 9% share of cement use. Behaviour of weather has a significant bearing on rural cement demand. Unseasonal heavy winter rains and hailstorms in all northern states from Jammu & Kashmir to Uttar Pradesh have destroyed or damaged significant portions of standing crops. Income of farmers and those engaged in agri commodities trade have as a result fallen to an extent that they are left with no alternative but to postpone all construction of residential buildings and warehouses to future dates. This has impacted cement demand in the first quarter of 2015 and prices of the building material were also down.

OP Puranmalka, managing director of the country’s largest producer and exporter Ultratech Cement says,“the industry volume saw single a digit fall in the March quarter. In March alone, volume decline was 15% to 18% due to weak government spending and impact of unseasonal rains. Volume trends were better in April than in previous month but not on a year-on-year basis.” Now the government and all industries, including cement are concerned about weatherman’s forecast of a weak southwest monsoon (June to September) this year. Inevitable fallout of weak monsoon is rise in prices of farm commodities making reduction in interest rates a difficult proposition. Puranmalka, however, says “it’s too early to predict how the weak monsoon will impact cement demand. The rural market is quite important for us. At the same time, government initiatives like housing for all, smart cities, infra spending and concretization of roads are likely to have a positive impact on the cement industry in the next three to six months.”

One redeeming feature of Indian cement industry is capacity consolidation is continuing apace. Holcim of Switzerland and Lafarge of France have had separately major presence in the Indian market. Merger of the two world leaders will further strengthen the combined group’s position here. Ultratech, the flagship company of Kumar Mangalam group, continues to up its capacity both by acquiring working cement factories and building clinker and grinding units. Last year it bought a plant each in Gujarat and Madhya Pradesh from Jaiprakash group, and since raised production quality of the two units to Ultratech level. By next March, Ultratech will have capacity of 71mt to be further raised to 100mt by 2020. 

Tough times for Brazil’s cement industry, as country’s economy slows to a halt  

Brazil’s cement industry is facing difficult times at the moment, writes Patrick Knight. After a decade during which the amount of cement used doubled from 35mt (million tonnes) a year in 2003 to more than 70mt in 2012, demand has stagnated in the past couple of years. There are few signs of any improvement in the near future, and the economy could even shrink this year.

The industry in Brazil is facing a big shake-up as well, following the merger of two of the world’s largest cement companies, Lafarge and Holcim, both of them leading players in Brazil. Between them, the companies will have to dispose of close to 20% of the almost 20mt capacity they control in Brazil, the world’s fifth-largest market for cement.

In common with what is to happen in all the other countries where Lafarge and Holcim operate and will be obliged to dispose of capacity, the surplus in Brazil is to be sold to the Irish CRH company, reportedly the world’s leading asphalt maker.

As a result of this sell-off, the existing companies in Brazil will have to face something they had tried desperately to avoid in recent years by various blocking tactics, the arrival of a large new player, bringing the possibility of much greater competition and lower prices.

The Brazilian economy grew by only 0.1% in 2014, the smallest amount for more than a decade, while there was a 3% fall in output in the first quarter of this year. The low growth was caused by the combination of the sharp fall in the prices of most of the commodities which now generate two-thirds of Brazil’s export earnings and the end of a 15-year period when consumers’ incomes grew steadily each year.

This was caused mainly by steady rises in real wages and pensions and because, after growing by up to 20% a year for a decade, access to credit was curbed last year after many borrowers got into difficulties.

The situation has been made worse by a series of financial crises, the most serious involving the country’s giant oil company, Petrobras. State-owned Petrobras has been involved in a massive corruption scandal, involving pay-offs by suppliers to politicians and others. This has greatly undermined the authority of a government whose president was only re-elected at the end of last year, but who is now rejected by almost two-thirds of voters.

A total of 75% of the 70mt of cement now made and sold in Brazil each year is used by the civil construction industry. But with a sharp fall in the number of new properties sold last year, despite the fact that house prices have fallen by up to 20% in the past few months, demand for cement by this key industry has fallen sharply. Although demand by ‘self builders’ — people building and upgrading their own properties — continues fairly strongly, this is not sufficient to keep demand growing as it has done for the past ten years.

Because of the ongoing enquiry by Brazil’s monopoly commission Cade into alleged restrictive practices and overcharging by companies in the industry — with five leading companies liable for massive fines — the National Union of Cement Industries, SNIC, is not permitted to publish production and sales figures at the moment. Demand grew by an estimated 2.5% in 2013, but fell by as much as that last year, to reach an estimated 70mt. Sales are expected to fall again this year. The industry now has sufficient capacity to make about 85mt at its 300 or so mills. It had been anticipated until recently that all this capacity would be being used by the end of this year or early in 2016. This will not now happen.

An economic model which allowed more than 30 million Brazilians to be vertically mobile in the past 15 years, most able to consume considerably more than in times when very high inflation prejudiced the majority of the population, has now run its course. Aware of this, the government decided to switch priorities and encourage massive investments in Brazil’s creaking and seriously inadequate infrastructure.

Plans to build or improve tens of thousands of kilometres of roads and railways, and to upgrade ports and airports in an attempt to ease bottlenecks, many prejudicing exports, were prepared. It was envisaged that up to $US200 billion would be invested each year on new projects needed to reduce the present high cost of transport. There has always been a long delay between decisions being taken to invest and work actually starting on the ground in Brazil. As a result, many projects which it had been anticipated would move forward last year, are still on the drawing board. The government’s severe financial difficulties, including a fall in tax revenues and greatly increased difficulties in borrowing, has meant that work has had to be halted on numerous partly completed projects as well. This, coupled with the delay in starting new projects, is having very adverse consequences for the construction industry as a whole, and the demand for cement in particular.

The merger between the world’s number one cement maker, the Swiss-owned Lafarge, and the French-owned Holcim, now number three, will have a major impact in Brazil, the world’s fifth- largest market for cement, and until the past couple of years, one of the fastest growing. The per capita consumption of cement in Brazil averages only about 350kg a year, far below that of other ‘BRIC’ countries, notably China, which spends far more on infrastructure than does Brazil, so in theory there is plenty of scope for further growth.

The multi-billion-dollar deal first announced early last year has been given the go-ahead by Cade, with the proviso that the two companies should each sell some plants which are near one another. Concerned that there is insufficient competition in Brazil, a state of affairs which has allowed prices to remain well above the international average, Cade wants plants owned by the same company to be at least 300km from one another. The merged company will have to sell two or three mills, with capacity to make about 4.5mt.

The merger of Lafarge and Holcim apparently almost came unstuck in March this year. This was mainly because of the fluctuations of the two currencies involved, the Swisss franc, in which Lafarge’s assets are measured, and the Euro, in which the assets of the French-owned Holcim are set, caused the initial calculations the deal was based on to be altered. However, changes have now been made to take account of this, and the deal is now set to go ahead.

The assets which Lafarge and Holcim will have to dispose of, in numerous countries mainly in both western and eastern Europe, as well as Brazil, will be taken over by the Irish CRH company, reportedly the world’s largest asphalt maker.

Following the sale of assets, CRH seems set to become the fourth-largest company in Brazil’s cement industry, after Votorantim, which has a 40% share, the Joao Santos group, which now has about 11%, and the Camargo Correa group, with 10%. The merged Lafarge/Holcim group, which before the merger had about 19% of the total sold, will have slightly less than that in future.

One of the claims of Cade, was that the big players in Brazil, agreed between them to manipulate prices in an attempt to ensure that no new players were attracted to the market, and threaten prices which are generally considered to be substantially higher than those elsewhere. Votorantim had apparently hoped to obtain some of Lafarge’s and Holcim’s assets, but this would not be regarded with favour by Cade, in a market already seen as excessively concentrated, while the giant Cemex company had also been eyeing the Brazilian market.