Riding on optimism, cement ind plans ahead

Need for additional capacity being debated

These are optimistic days for cement industry in Andhra Pradesh as production is going full stream. The near total capacity utilisation of cement plants "� both in the North and the South since March 2005 "� has helped beat the uncertainties and now the industry is debating the option of going in for additional capacity.

Andhra Pradesh, which emerged as the largest cement producer in the country following the division of Madhya Pradesh, is expected to witness some movements in the coming months with mini-cement plants such as Coromandel, Anjani and NCL said to be mulling expansion.

Despite the prices of cement in Andhra, which is a surplus state, averaging around Rs 115 per bag when compared to Rs 150 per in the neighbouring Tamil Nadu, small players appear bullish and plan to take advantage of the spurt in cement consumption across the country. The slow pace of growth in PPC cement (blended with fly-ash) due to resistance from urban consumers is also said to have added to the hopes for expansions.

Industry sources said that negotiations are under way by a couple of mini cement companies for tie ups with banks to fund their capacity addition plans.

"If we are able to exploit the present surge in demand for cement in the next couple of years, the pay-back time would be very attractive," Ramesh Chandra, managing director of Coromandel Cement Limited, told Business Standard.

According to Ramesh Chandra, an average 10 per cent growth in the next three years would certainly necessitate additional capacity and this is the right time for the industry to plan. At present, there are about 20 major and 29 mini-cement plants in the state with a total production of around 2 million tonnes per month.

However, when it comes to expansion plans, bankers are a bit guarded in spite of the sector coming out of negative rating a couple of years back.

Said R J Vaidyanathan, general manger (credit), of Andhra Bank: "Cement industry is now on the path of consolidation with the help of the current demand. But I don't think there is any great scope for a significant capacity addition as there is excess capacity built into the system." According to him, only big players can sustain capacity additions with the help of their wider reach in the market.

Echoing similar view, the state revenue department recently opposed the move of extending tax sops to new cement units citing the same reasons of excess capacity and lower prices in the state.

Despite the opposition, cement industry has been kept out of the ineligibility list by the industry department in the recently issued GO pertaining to the new industrial policy.

"Take the case of Panyam cements and other smaller players. They had become sick on account of low prices due to excess production as almost 60 per cent of the production used to be exported from the state till recently," a senior official in the revenue department said, maintaining that the government policies would not affect the interests of the existing units.

"This view would have made sense six months back when all the units were running at around 60 per cent capacity utilisation. It does not hold good today. Plants are now running at 100 per cent capacity," an industry spokesman said.

Reimbursement of 25 per cent of the sales tax paid by the units and other incentives announced in the new industrial policy are also attracting the attention of smaller players to go in for expansion. It is said that the eligibility list under the new policy would be reviewed after two years.

The state mining department also wants new capacities to be added in the state to tap the vast limestone reserves.

According to the department estimate, the state has 33,150 million tonnes of limestone reserves out of which the present production is only about 28 million tonnes a year. Mining department officials, in a recent presentation to chief minister Y S Rajasekhara Reddy, informed that the scope for setting up slag and fly-ash based cement plants near Vizag Steel Plant and thermal power plants is very much viable.

On the other hand, the local demand for cement has gone up to touch nearly 12 lakh tonnes a month from below one million tonnes in recent past. Once the works on irrigation projects enter a decisive stage, consumption may even touch 14 lakh tonnes, an industry observer said.

"In my view, by October 2005, there is a possibility of cement shortage if the builders and other consumers do not opt for blended cement," he said.