Mumbai: The 197-million tonne domestic cement industry is set to clock double-digit growth from next fiscal with demand outstripping even the 57-mt capacity addition expected by FY14, says an industry report by Ernst & Young India.
The Rs 77,800 crore (as of March 2010) domestic cement market -- already one of the fastest growing ones globally and the second largest among the emerging markets after China -- is on course to a double-digit growth path, it says.
“From FY13, the domestic demand is expected to exceed supply... From FY12 through FY14, the domestic cement industry will add at least 54-mt new capacity,” says Ernst & Young India partner Nitin Gupta in a report titled ‘Cementing India.’
But he notes that this additional 57-mt capacity is unlikely to be absorbed by domestic demand this fiscal and it sees capacity utilization level remaining at around 80% during this fiscal.
However, the report adds that from FY13 onwards demand will outstrip supply and this higher demand is expected to continue in the medium to long-term.
The report places its optimism on two factors mainly: the very low per capita intake and the massive $1 trillion infrastructure push being given by the government over the next five years.
“Although India is one of the largest cement markets in the world, per capita consumption is still low compared to the global average as well as that of other large markets like China and the US.”
“Moreover, the country lags significantly behind China on the infrastructure front and can register an unprecedented growth in infrastructure in future. This is a clear indicator that the industry has huge growth potential and is on course to witness double-digit growth in the coming years,” he says.
The several structural improvements over the years like increase in the level of concentration, entry of global players, improvement in blending ratios, rising role of captive power plants, and efficiency improvement have led to the rapid growth in the domestic industry, the report notes.
These improvements have resulted in the share of the top three players in total capacity increasing from 37% in FY2000 to a high 47% in FY2010, while their capacity nearly rising threefold-- from 42 million tonne to 114 million tonne during this period, says Gupta.
A key factor is consolidation that has resulted in substantial reorganization of capacities, says the report. “This consolidation has not only inculcated an enhanced supply discipline in the industry, but has also made it difficult for producers to only compete on prices any more,” says the report.
Another interesting trend is the keen interest being displayed by global players in the domestic market since the past few years. Accordingly most global majors are present here today and contribute over 20% of the domestic capacity, points out the report.
The report further notes that continuous increase in capacity has seen a scramble for controlling the key inputs among the producers. But this has its pitfalls too as allocation of limestone leases and land acquisition have becoming increasingly difficult, despite the fact the country has one of the largest limestone reserves in the world.
But looking at the opportunities, companies have found out a way to overcome this raw material problem through mergers and acquisitions for capacity expansion, notes the report.
Another enabling major development is setting up of captive power plants by manufactures, due to the increasing power outages by the state electricity boards, notes the E&Y report.
“At the national level, as much as 64% of cement produced in FY10 was through captive power, compared to 18.1% in 1992-93 and 45.3% in 2000-01,” says the report.
Coal being an important ingredient for cement production, coal-sourcing arrangement has evolved over a period of time, notes the report and adds that as government collieries have been failing to meet the demand, cement companies are now looking for mine acquisition in India and abroad to meet this gap.
On the global side, the report says that the share of emerging markets has been continuously growing in cement production and consumption over the past few years.
“Emerging markets have become the largest producers and consumers of cement with their share in global consumption increasing from 72% in 1990 to almost 90% in 2010, driven by favourable demographics, rising urbanization and increasing demand for housing and infrastructure,” says the report.
This has seen China emerging as the largest cement consumer in the world, followed by India, which is also the fastest growing among the EMs.