The 207-million tonne domestic cement industry - the world's second largest after China's - is anticipating tough times ahead this year. A lower GDP growth rate will affect cement demand. Besides, the industry was on an expansion spree and this expenditure is straining finances.
The cement industry has found itself being sandwiched until recently between exponential rise in input costs and government pressure restricting cement firms from passing on the increased costs to the consumers as inflation touched a 16-year highs. Almost all companies were hit on the bottom line.
On the positive side, input costs (which went up unexpectedly last year) have come down considerably with imported coal at $80 a tonne against as high as $200 a tonne last year, the industry is in a relatively comfortable position than what it was a few months back. However, cement makers are not complacent and are relentlessly looking for further cost cuts and increasing efficiencies anticipating that the worst is still to come.
There have been a few price increases in the recent months as there has been a sudden demand from non-metros, semi-urban, retail and rural regions of the country since November. But market players recognise the fact that the continuous hike may be a remote possibility in the second half of the current year and prices may remain stable if not rolled back. Industry analysts say the current demand is pre-election demand.
The cement industry had anticipated a growth rate of above 11 per cent in the current Five Year Plan. However, in 2008 growth reduced to 8 per cent. Moreover, with GDP growth being downsized further, cement players and industry analysts opine that in 2009 and 2010, maintaining a growth of 6 per cent will, in itself, be commendable.
The industry is expected to add around 40 million tonnes of capacity in 2009. Under the pressure of incremental capacities going on stream coupled with far less demand than projected earlier, the industry's profitability will be squeezed. Cement players are of the opinion that an EBIDTA margin of 20% is what is expected in the coming years. The EBIDTA margins had risen to as high as 35% for some companies last year.
Considering this, companies have started taking cost cutting measures, improving operational efficiencies of plants, opting for renewable sources of energy among other steps.
ACC - the country's largest cement maker and part of the Swiss cement giant Holcim - has geared up to take the upcoming challenges head on. The company could generate a net cash of Rs 1,708 crore in 2008 from its operations, a dip of 16.5 per cent against Rs 2,023 crore in the previous year. Moreover, its profitability drastically dipped over 30 per cent to Rs 1,213 crore in 2008 compared with Rs 1,737 crore in 2007.
Sumit Banerjee, managing director, ACC, terms the past year as an unusual year. Further, he says that the current year is another "ballgame". The first four-five months of 2009 will see construction momentum pulling through but what will happen in the second half of the year will depend on the success of the catalysing actions of the government's stimulus package, he adds.
The company views the recession to be deeper and the recovery to take longer than what was anticipated earlier. It is trying its hands at all the viable options to reduce costs and maintain competitiveness. Whether it is on the front of power costs, alternative fuels, renewable sources of energy or marketing and distribution network.
To reduce operating costs and input costs, ACC is focusing on augmenting blended cement production, improving the efficiency of factory equipment and lowering power consumption. Simultaneously, the company has launched an organisation wide cost reduction project to improve its competitiveness.
As a part of innovation and adoption of technologies, ACC is promoting use of alternative fuels and saving on expensive fossil fuels. Its power and fuel costs increased to Rs 1,600 crore last year against Rs 1244 crore in the previous year. The company put up wind farm in Rajasthan and Tamil Nadu with a total capacity of 37 MW per annum. It plans to add more such wind energy producing farms at its other plant locations.
It has also kept its option open to get into hydel projects in the northern states of Himachal Pradesh and Uttarakhand. "We are exploring two-three options. One is the possibility of new projects, another is looking at the existing hydropower companies - the smaller ones, and lastly those projects which are in an intermediate stage with all the approvals having been received," says Banerjee. The company has already bid for a hydel project of 13 MW in Himachal Pradesh in an open tender with the state government.
ACC, in order to optimise resource extraction, is using a quarry management (QM) system at some of its mines for limestone. A QM system integrates information pertaining to quarry topography, quality data, equipment in order to achieve efficiency in the operations of the mines.
Before implementing QM, sub-grade material, mainly waste material, high magnesium limestone and shale, was dumped resulting in faster depletion of its resource base and higher cost of mining. With this system, ACC says, cost of mining has come down by 22 per cent due to optimised operations.
Since most cement players are coming up with fresh capacities, brand building too has become a focus area. ACC is taking steps to enhance its marketing capability with select institutional customers and strengthening its existing relationships with the extensive dealer network. At the same time, to harvest the rural and semi-urban consumption demand, the company is seeking to bolster the distribution network and the brand in these areas.
On the alternative fuels and raw materials (AFR) business, ACC has recorded a saving of Rs 23 crore in 2008, 37 per cent more than what it did in the previous year. The business mainly focuses on successful co-processing of different industrial-waste as fuel in its various cement units across the country.
"Our target is to derive a bottom line benefit of Rs 100 crore in the next three years from the AFR business," says Banerjee. Though he admits that replacing coal is a strategic need, "non-conventional sources of energy may only be in the order of 5-10 per cent of our coal requirement," he adds.
Presently, ACC is using waste from manufacturers of paints, automobiles, textile machinery, steel plants, FMCGs, refineries and petrochemicals.
Besides all these measures, the country's largest cement maker is taking up jatropha plantations. It has set up a target of planting 5 million saplings by 2010, out of which, the company already has completed over 2 million. Along with jatropha, ACC has found out another option of planting subabul. "We are finding that subabul is a better option. It is less water intensive, grows faster than jatropha and gives results in lesser number of years," says Banerjee.
