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Mumbai: Top cement makers are struggling to increase prices despite recent consolidation fetching them a larger share of the organized cement market, as smaller firms which benefit from advantages of location and logistics continue to keep prices down.

UltraTech Cement Ltd, ACC Ltd and Ambuja Cements Ltd now control about 40% of the total 350 million tonne per annum (mtpa) capacity in India, following recent consolidation in the sector. But smaller firms, such as Orient Cement Ltd, Wonder Cement Ltd and JSW Cement Ltd, claim their proximity to buyers and raw material sources and outweigh the benefits of scale that top firms are trying to leverage.

“Absolute pricing power is a myth in the industry. Profitability for many cement makers is determined by new entrants many a time. Small and new players can bring down the prices for the entire industry," said an analyst with a domestic brokerage.

“Even in markets like central India, profitability is at its bottom because there are too many new entrants. Also, having a very high market share has not given any of the top cement makers any pricing power," he added. He requested anonymity since he is not allowed to speak to the media.

Take the case of Orient Cement, which operates mainly in Telangana as well as Khandesh and Jalgaon regions of Maharashtra. According to managing director Deepak Khetrapal, the company enjoys a market share of more than 30% in some of its markets. He says that although mid- and small-sized companies are under attack from the larger firms in some markets, lower logistics costs give them an advantage by allowing them to price competitively. “We have set a strong supply-chain and logistics network in areas, which are far from the main markets of larger players," said Khetrapal, adding that the cement sector is largely driven by logistics.

According to a 17 December report by Ambit Capital Pvt. Ltd, Orient’s proximity to critical inputs (coal and fly ash), rail connectivity for inward and outward transportation and low lead distance (less than 300km) support its cost efficiencies.

“Orient’s raw material costs are lower than majority of the pan-India and regional players, barring Ambuja and Shree," Ambit analysts Achint Bhagat and Nitin Bhasin said in the report.

Another executive from a mid-sized cement firm noted that companies located close to their major markets will always pose a threat to rivals. “If you sell within a certain distance from where your plant is located, you should be fine. Also, if smaller players drop their prices drastically, the larger ones will not sustain since their volumes will fall," said the executive. He requested anonymity since he is not authorized to speak with the media.

To be sure, the ability to compete on pricing also depends on the regional dynamics.

According to Pankaj Kulkarni, director, JSW Cement, there are many small firms that are ready to spoil the market, even though there are three to four manufacturers controlling a large chunk of capacities.

But this is not true in all markets. “When there is excess capacity, the smaller brands can play a critical role in price distortion, but in certain markets like the south, they can’t create significant issues for pricing since prices are anyway very low," said Kulkarni. “In the north, it is possible, since prices are very high and smaller firms can cut prices significantly."

Despite some of the inherent advantages that smaller cement firms enjoy, some of them are starting to get cautious, taking note of the consolidation in the industry.

Rajasthan-based Wonder Cement has no plans for quick expansion, as this could lead to an increase in transport and logistics costs, said Vinay Wadhwa, executive president (marketing) at Wonder Cement.

With a capacity of 4.9 mtpa, the company currently commands about 8% share in the Rajasthan market.

“We will focus right now only on Rajasthan, and Gujarat may be, because any expansion will mean an increase in costs," said Wadhwa, adding that pricing dynamics in the industry remain complicated. “Pricing will ultimately depend on the product, and that any big player with a substantial capacity will not make any difference to the pricing dynamics."

Another mid-sized firm JK Cement Ltd, which has a capacity of 7.5 mtpa of grey cement, is also undertaking various cost-saving measures to improve its operational metrics, according to a September report by Espirito Santo Securities Ltd.

The report says the firm can achieve cost savings of 135 crore in fiscal 2015-16 in areas including power consumption, coal consumption, and freight savings.

The management of JK Cement did not want to comment for this story.

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