'Cement industry in India is on strong foundation'

Q&A/ Ramesh Chandro

Cement industry is one of the main beneficiaries of the infrastructure boom. While on the one hand several big and small cement companies are actively considering expansion plans in anticipation of further growth in demand for cement, on the other, a phase of acquisitions and mergers among the existing players is also not being ruled out in the immediate future, according to Ramesh Chandro, president of the All India Cement Manufacturers Association and managing director of Hyderabad-based Ckoramaandel Cements Limited. Excerpts from an interview:

What is the present scenario of the Indian cement industry? How are the mini cement units faring in terms of capacity utilisation and margins?

The present scenario of cement industry is very good in terms of demand and with the prices going above Rs 160 to Rs 180 everywhere. Most importantly, the gap between the demand and supply does not exist any longer in any part of the country.

Domestic consumption with 11 per cent increase and exports keeping up with the last year levels, the Indian cement industry is expected to cross 150 million tonnes in dispatches, including domestic consumption, and exports during 2005-06 from all plants put together, including mini cement plants. Mini cement plants everywhere are operating at 100 per cent capacity utilisation. The margins are improving in line with others.

Has there been any change in the pattern of consumption among the important regions and also in the pattern of movement of cement across the states?

Cement consumptions are as follows: South 30 per cent (26 per cent), East 17 per cent (17 per cent), North 20 per cent (21 per cent), Central 16 per cent (17 per cent), and West 18 per cent (20 per cent).

The figures for the current year are for April-November period while the figures in brackets represent full year for the year 2004-05. Also, there is an increase in the consumption of PPC cement from 48 per cent to 50 per cent.

Today, cement from Andhra is going all over India, including Assam, Meghalaya, Jharkhand, Orissa, West Bengal, Chattisgarh, Gujarat and Maharastra. More cement is likely to flow into Tamil Nadu from the state in view of cut in sales tax.

Any further increase in demand in the South India will benefit the cement industry here. Cement movement from Gujarat to Mumbai is also coming down due to exports while cement movement from Orissa into Andhra has stopped and, in fact, cement is flowing into Orissa as well.

Which of the sectors are contributing the most to the demand for cement in Andhra as well as other southern states? What is the current demand here and is there any scope for its further growth in the next one year?

Earlier in 2004-05, the housing sector alone consumed 65 per cent of the total domestic consumption. With the launch of several infrastructure projects, the housing consumption may come down to 55 per cent as the infrastructure and other sectors are expected to move up to 45 per cent from the present 35 per cent.

Still, the main sector of consumption continues to be housing, including commercial space, occupying more than 60 per cent. The current demand in the state for 2005-06 is expected to cross 15 million tonnes (11.5 million tonnes). We expect the demand here to go past the 17.5-million mark in 2006-07 in view of irrigation and infrastructure projects being taken up in the state.

The development activity in Hyderabad alone will give rise to an additional demand of 2-3 million tonnes a year with major projects like outer ring road, satellite townships, international airport creating a huge demand for cement.

Weaker sections' housing, construction of public toilets, schools in rural areas apart from several private and public infrastructure projects will also give tremendous boost to the cement consumption in the state. Most importantly, irrigation projects, worth nearly Rs 1 lakh crore, will trigger unprecedented demand for the next 5-7 years.

Several companies are announcing expansion plans. Will this have any impact on the margins?

I don't think so. This is because up to 2008, about 21.5 million tonnes capacity is expected to be added by expansions. This year's domestic demand will be 140 million tonnes. Now that the GDP is expected to grow to 8 per cent, growth in the cement consumption is also expected to remain above 12 per cent per year.

This means, we need an additional 50 million tonnes for the next three years. So, it clearly shows that the proposed expansions will not impact the margins.

Demand for cement in South will be more in the coming years in view of better infrastructure required for the IT companies and their professionals. Of all the regions, South is the largest producer as well as the largest consumer with 32 per cent of the country's cement being produced and dispatched from the region.

How cost competitive are the cement units in the state, mini cement units in particular?

The cement plants in the state are cost competitive vis-a-vis any plants in the country. But there is always a scope for further modernisation and the industry is doing it.

The Indian cement industry is 70 years old. Some of the latest installations are the best in the world. Unlike in the past, today the best technology is available for mini cement plants too.

Andhra cement firms appear to be doing well even though the prices in the state are the lowest in the country?

Today, the prices across the country are going up to unprecedented levels and plants here are able to reach out to far away places in tune with the demand.

As a result, all the cement plants in the state are operating at 100 per cent capacity utilisation and with improved bottomlines. The logistic cost for AP companies in meeting the local demand is less compared to other states since cement plants are scattered all over the state.

Earlier, the local demand was hardly 30 per cent of the capacity and the prices in other parts of the country were also not attractive due to transport costs. Now, the local demand is more than 60 per cent of the capacity and the prices elsewhere in the country are reaching the viable levels of Rs 180 to Rs 200 per bag.

So, now the logistic costs are not coming in the way of AP players to dispatch cement to distant places. Also, as limestone is available only in some states like AP, we will always enjoy the benefit.

Are local cement companies facing any threat due to price war from the upcountry companies?

At a time when Andhra had surplus supplies, the upcountry cement companies used to dump their surplus whenever the prices were high in the state and eat into the profits of local players.

Now, with the demand shooting through the roof all over the country, we do not foresee any such threat in future. The most important factor for better prices is consolidation of the industry. It has just begun and we will see more consolidation in the next two years. This time price war would be waged for acquisition of cement plants.

How about the overseas cement exports from the state?

There are many enquiries for cement with reasonable prices. About 36 states in the US are facing shortage of cement and their construction activity has slowed down. To overcome the problem, the US has relaxed the import duty on cement recently.

What are your expansion plans?

We are increasing our capacity to around 6 lakh tonnes a year by acquiring state-of-the-art equipment. This will not only bring down the cost of production considerably but also make the production cost-effective. The expansion is likely to be completed in the fiscal 2006-07.