The Indian cement industry has become increasingly attractive to foreign firms. The French major, Lafarge, set the ball rolling with its acquisition of TISCO's and Raymond's cement plants. A British company, Blue Circle, is reportedly acquiring Century's cement capacity. And an Italian firm, Italcementi, is going in for a joint venture with Zuari Industries to run its existing cement plant. This interest from abroad comes at a time of large-scale restructuring of the industry through a series of mergers and acquisitions in recent months. The industry is clearly moving towards a structure in which a handful of large domestic players will go head to head against the international giants.
Both demand and supply factors are responsible for the restructuring. At the core of international interest in the Indian cement market is the enormous long-term potential for growth in consumption. Data for the late 1990s show that India's per capita cement consumption was less than 100 kg, compared with a world average of about 250 kg. Cement consumption tends to grow slightly faster than GDP at low levels of per capita GDP. It plateaus off in the developed countries. International producers are thus faced with stagnant markets in their home countries, and have to look to the developing world for their growth. India is clearly a long way off from the plateau, and promises to make large investments in infrastructure, all of which will require large quantities of cement. In addition, as income levels rise, a larger and larger percentage of the population will be able to afford concrete housing. From a cement producer's perspective, India presents a very rosy future indeed.
As attractive as the prospects are, the competitive pressure is going to be intense. Being a largely undifferentiated commodity, premiums are difficult to command. Competitiveness is almost entirely based on cost control. The only source of market power is location, with respect to raw materials and markets. Cement is a transport-intensive commodity, so the country's inefficient transport system allows producers to exploit some limited local monopoly power. Consolidation through mergers is driven by both these considerations. Larger scales of operation lead to lower average costs, and the expansion strategy is based on entering markets, which afford some market power.
In fact, it is the importance of location that makes takeovers the more attractive vehicle for entry into the Indian market. A new plant will cost in the range of $80 to $90 per tonne of capacity. This is not substantially more than what the international firms are willing to pay for existing capacity. Why not just set up a new plant with state of the art technology? Because technology hasn't moved very much for a while, and the new plant will inevitably have to be set up in a less attractive location than existing ones. The higher costs of inferior location are not compensated for by marginal technological advancements. Also, cement plants appear to be easily available for sale, as many multi-product firms who diversified into this industry are themselves restructuring on the basis of core competence. All in all, the cement industry is demonstrating the virtues of competition; rising volumes, lower prices and efficiency being rewarded.
