Surviving cost pressures key challenge for new entrants in cement sector
In the past few years, a slew of new entrants have made a foray into the cement industry. Interestingly, this is not limited to companies belonging to sectors having synergies with cement, such as steel and power.
As the following chart shows, new entrants also include diversified industrials as far apart as oilseeds, fast-moving consumer goods and shipyards. What’s more, this is not an exhaustive list and does not include smaller new firms.
For companies like JSW Steel Ltd, venturing into the cement sector and expanding capacities could be a strategic call, but what about the others? The government’s thrust on infrastructure and allied activities along with schemes like “Housing for All” is anticipated to boost cement demand significantly and that seems to have lured others to jump on the bandwagon.
According to Elara Capital (India) Pvt. Ltd, incremental demand from housing and infrastructure is expected to boost cement growth to 7-8% in fiscal year 2018. Region-wise, south India will show the biggest rise in demand from infrastructure and the highest share of surplus capacity addition, followed by north India, it added.
However, what could make survival challenging for new entrants is the fact that demand revival has taken longer than expected and costs are escalating.
Rising costs, particularly input cost and freight, among others, continue to erode margins of larger incumbents. Also, newer cement makers will have to incur additional funds on advertising and branding, thus weighing on their overall cost structure. Though auctioning of limestone mines has picked up pace in the recent past, the price at which some of them are sold is not cheap by any means, say analysts. Limestone and clay are the raw materials required to produce cement.
Earlier this month, Adani Cementation Ltd, JSW Cement Ltd and Shree Cement Ltd won bids for three limestone mines via an e-auction in Gujarat, thus fetching the state government an enormous sum of Rs16,201 crore, stated a media report. This is almost 2.5 times the revenue the state would have earned had it followed the traditional allotment process, the report added.
Meanwhile, cement prices across the country have seen a seasonal correction and are expected to remain under pressure given the slump in demand. In such a scenario, it will be certainly difficult for newer entrants into the industry to pass on increased costs to consumers, especially given that even established companies have not been able to do so.
To conclude, some new entrants may have deep pockets, but the delayed demand recovery coupled with surging costs means longer gestation, thus impacting business viability. This could result in some of them exiting the business, a case in point being Reliance Cementation Pvt. Ltd that commissioned operations in fiscal year 2014 and recently sold its cement assets to Birla Corp. Ltd.
Reliance Group companies have sued HT Media Ltd, Mint’s publisher, and nine others in the Bombay high court over a 2 October 2014 front-page story that they have disputed. HT Media is contesting the case.