MANAGERIAL ECONOMICS PROJECT

CEMENT INDUSTRY IN INDIA

SECTION -H
SUBMITTED BY:-

GROUP MEMBER'S NAME

SAMEER GHIYA HARSH MODI NIDHI MIMANI PRIYANKA MISHRA VARSHA JENA

ENROLLMENT No.
10BSPHH010674 10BSPHH010265 10BSPHH010460 10BSPHH010567 10BSPHH010858

SEAT No.
31 51 02 54 68
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ACKNOWLEDGEMENT
Nothing concrete can be achieved without an optimal combination of inspiration and perspiration. No work can be accomplished without taking the guidance of the import. It is only the critiques for the ingenious intellectual that helps transform a product into a quality product.

A project is a major milestone during the study period of a student. As such this project was a challenge to us and was an opportunity to prove our caliber. It would not have been possible to see through the undertaken project without the guidance of Prof. A Aruna. It was purely on the basis of her experience and knowledge that we were able to clear all the theoretical and technical hurdles during the development phases of this project work.

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CONTENTs
ACKNOWLEDGEMENT.02 EXECUTIVE SUMMARY04

1. INTRODUCTION.05 2. OBJECTIVE & METHODOLOGY....06 2.1 Objectives 2.2 Methodology 2.3 Limitations 2.4 Scope 3. ANALYSIS OF OBJECTIVES07 3.1 History and Progress of Cement Industry in India 3.2 Market Size & Composition 3.3 Production & Capacity Utilization 3.4 Cost Structure 3.5 Price Determination 3.6 Demand & Supply 4. PROBLEMS OF CEMENT INDUSTRY20 5. GOVERNMENT POLICIES22 6. PORTERS 5 MODEL FOR CEMENT INDUSTRY....25 7. SWOT ANALYSIS26 8. CONCLUSION..28 9. BIBLIOGRAPHY..30

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EXECUTIVE SUMMARY

The cement industry is one of the main beneficiaries of the infrastructure boom. With robust demand and adequate supply, the industry has bright future. The Indian Cement Industry with total capacity 151.2 million tones is the second largest after China. Cement industry is dominated by 20 companies who account for over 70% of the market. Individually no company accounts for over 12% of the market. The major players like L&T and ACC have been quiet successful in narrowing the gap between demand and supply.

Private housing sector is the major consumer of cement (65%) followed by the government infrastructure sector. Similarly northern and southern region consume around 20%-30% cement while the central and western region are consuming only 18%-16%

The company continues to emphasize on cost cutting through enhanced productivity, reduction in energy costs and logistics expenses. The cement sector is expected to witness growth in line with the economic growth because of the strong co-relation with GDP. Future drivers of cement demand growth in India would be the road and housing projects. As per the Working Group report on Cement Industry for the formulation of the 11th Plan, the cement demand is likely to grow at 11.5 per cent per annum during the 11th Plan and cement production and capacity by the end of the 11th Plan are estimated to be 269 million tones and 298 million tones, respectively, with capacity utilization of 90 per cent.

In brief we have covered Cement market including market size, composition, and market growth, latest Trends & Opportunities, different policies adopted by the government for the Indian cement industry, cement production and capacity utilization as well as the current scenario of demand and supply.

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1. Introduction

The cement industry is one of the vital industries for economic development in a country. The total utilization of cement in a year is used as an indicator of economic growth. Cement is a necessary constituent of infrastructure development and a key raw material for the construction industry, especially in the governments infrastructure development plans in the context of the nations socioeconomic development.

Facts about its role play in the Indian economy

The Indian cement industry is one of the booming sectors of the Indian economy The infrastructure development of the country in the recent years is the demand driver for the cement industry The Indian Cement Industry is experiencing the entry of many foreign players in the Indian market The average monthly capacity utilization and cement dispatch during the year 2006-07 was 94% and 155 million respectively. It maintained a steady growth rate up to 2007 and after that recession starts affecting the industry and there is decrease in rate. During 2009-10, dispatches had risen 7.94 to 217 million tones, while production was 10.8% higher at 224 million tones.

Role of Cement Industry in India GDP-Production

India ranks second in the production of cement in the world The ban on cement exports imposed 2 years back has significantly pushed down overall exports of the building material, hitting an eight-year-low in FY09. The export of the cement in the year 2006-07 was 9.3 million tones The cement industry in India constitutes of 365 small cement manufacturing units and 130 large cement manufacturing units The total installed capability of the cement manufacturing is 254 million tones (as on april 2010) The large manufacturing units accounts for 70% of the total output of cement.

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2.OBJECTIVES & METHODOLOGY

2.1 Objectives
To study Cement Industry, including market size, composition, and market growth. To analyze the Cement production and capacity utilization. To analyze the Cost Structure of the Cement Industry To trace out current scenario of demand & supply. To Study policies of government related to the Cement industry. To analyze latest Trends & Opportunities.

2.2 Methodology
The research is based on the information collected from various types of secondary resources. The method adopted for these findings is secondary method as there was limitation in collecting primary data about the cement industry. The main aim is to focus on demand, supply, major players and trends of the cement industry. The following sources have been taken for the preparation of this research: Internet reports Books Journals .2.4 LIMITATIONS Due to time and resource constraints, primary data has not been used. Only secondary sources of data have been used for industry analysis. As the size of cement industry is large, all the companies have not been covered in the study. All the parameters have not been covered due to the limited scope of the study. The conclusion of the analysis is based on the assumption that the data available is reliable.

2.5 SCOPE
The cement industry has been introduced in more detail taking into account industry specific aspects such as structural composition, cost, pricing, production, technologies, energy consumption within processes, environmental impacts, sector specific policies etc. The results are then interpreted within a broader context of structural and policy changes in the sector as well as other sector specific aspects. This study aims at analyzing the impact of government policy and controls on the sector. We also consider the problems that are hindering the growth of the sector and its future prospects. ICFAI Business School - Hyderabad Page 6

3.ANALYSIS OF OBJECTIVES
3.1History of cement industry in India
The India Cements Limited, established on 21.2.1946 under Indian Companies Act 1913 as public limited companies with an authorized capital of Rs.200 lakhs is having its registered office at Dhun building, 827, Anna Salai, Chennai-600 002. It is to manufacture and market cement. It is the largest manufacturer of cement in south India and earliest cement company in independent India. The equity shares of the company are listed in NSE, BSE CSE, LSE and MSE. Prior to Independence The first endeavor to manufacture cement dates back to 1889 when a Calcutta based company endeavored to manufacture cement from Argillaceous (kankar). But the first endeavor to Manufacture cement in an organized way commenced in Madras. South India Industries Limited began manufacture of Portland cement in 1904.But the effort did not succeed and the company had to halt production. Finally it was in 1914 that the first licensed cement manufacturing unit was set up by India Cement Company Ltd at Porbandar, Gujarat with an available capacity of 10,000 tons and production of 1000 installed. The First World War gave the impetus to the cement industry still in its initial stages. The following decade saw tremendous progress in terms of manufacturing units, installed capacity and production. This phase is also referred to as the Nascent Stage of the Indian Cement Industry. During the earlier years, production of cement exceeded the demand. Society had a biased opinion against the cement manufactured in India, which further led to reduction in demand. The government intervened by giving protection to the Industry and by encouraging cooperation among the manufacturers. In 1927, the Concrete Association of India was formed with the twin goals of creating a positive awareness among the public of the utility of cement and to propagate cement consumption.

After Independence The growth rate of cement was slow around the period after independence due to various factors like low prices, slow growth in additional capacity and rising cost. The government intervened several times to boost the industry, by increasing prices and providing financial incentives. But it had little impact on the industry. In 1956, the price and distribution control system was set up to ICFAI Business School - Hyderabad Page 7

ensure fair prices for both the manufacturers and consumers across the country and to reduce regional imbalances and reach self sufficiency. Period of Restriction (1969-1982) The cement industry in India was severely restrained by the government during this period. Government hold over the industry was through both direct and indirect means. Government intervened directly by exercising authority over production, capacity and distribution of cement and it intervened indirectly through price control. In 1977 the government authorized higher prices for cement manufactured by new units or through capacity increase in existing units. But still the growth rate was below par. In 1979 the government introduced a three tier price system. Prices were different for cement produced in low, medium and high cost plants. However the price control did not have the desired effect. Rise in input cost, reduced profit margins meant the manufacturers could not allocate funds for increase in capacity. Partial Control (1982-1989) To give impetus to the cement industry, the Government of India introduced a quota system in 1982.A quota of 66.60% was imposed for sales to Government and small real estate developers. For new units and sick units a lower quota at 50% was effected. The remaining 33.40% was allowed to be sold in the open market. These changes had a desired effect on the industry. Profitability of the manufacturers increased substantially, but the rising input cost was a cause for concern. After Liberalization In 1989 the cement industry was given complete freedom, to gear it up to meet the challenges of free market competition due to the impending policy of liberalization. In 1991 the industry was de licensed. This resulted in an accelerated growth for the industry and availability of state of the art technology for modernization. Most of the major players invested heavily for capacity expansion. To maximize the opportunity available in the form of global markets, the industry laid greater focus on exports. The role of the government has been extremely crucial in the growth of the industry. Financial Year 2009 2010 The Indian cement industry with a total capacity of about 254mn Tonnes is the second largest market after China. Although consolidation has taken place in the Indian cement industry with ICFAI Business School - Hyderabad Page 8

the top five players controlling almost 45% of the capacity, the balance capacity still remains pretty fragmented. Cement, being a bulk commodity, is a freight intensive industry and transporting cement over long distances becomes very uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. While the southern region is excess in capacity owing to abundant availability of limestone, the western and northern region are the most lucrative markets on account of higher income levels. Despite apprehensions about the impact of inflation and a slowdown in industrial production and overall economic scenario, the outlook for the cement sector remains positive in respect of growth in demand in the foreseeable future. Infrastructure and housing are still moving apace. However what is of concern to the industry are staggering rise in input costs and pressures to cap selling prices at the same time. Unless the industry is able to recover cost increases, through suitable adjustments in selling prices through rational economic considerations, the cement industry will be under pressure.

3.2 Market Structure Of Cement Industry In India

The Indian cement industry is the second largest producer of quality cement, which meets global standards. The cement industry comprises 130 large cement plants and more than 300 mini cement plants. The industry's capacity at the end of the year reached 254 million tons which was 166.73 million tons at the end of the year 2006-07. Cement production during April to March 2008-09 was 181.31 million tons as compared to 168.31 million tons during the same period for the year 2007-08.Despatches were 178 million tons during April to March 2008-09 whereas 167.67million tonnes during the same period last year. During April-March 2007-08, cement export was 3.65 million tons as compared to 5.89 during the same period. Concentration Ratio for Market Share Market share of an industry is best determined by calculating the concentration ratio. Concentration ratios also tell about the type of competition in the industry. According to a generally followed norm we decide the market structure on the basis of Four Firm Concentration Ratio. Type of competition is determined by the value of concentration ratio.

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Concentration Ratio for Cement Industry

We consider the top 4 market players to calculate the Four Firm Concentration ratio. Here the firms are:1. Holceim Group (ACC LTD, Gujarat Ambuja) - 11.8%+ 7.6% = 19.4% 2. Aditya Birla Group (Grasim, Ultratech)- 9.6%+ 11.3% = 20.9% 3. India Cement- 6.9% 4. Madras Cement- 3.3% C4 comes out to be 50.5%. According to the general rules followed 40 %< C4 <90 % is a sign of Oligopolistic market. Application of Oligopoly in Indian Cement Industry Only a few firms supply to the entire market- In India the number of major cement firms are restricted to 59. At least some firms have high market shares and can influence the price- As we can see firms like ACC Ltd., Ultratech Cement, Gujarat Ambuja and Grasim have much higher share than the rest of the firms.

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 Firms exhibit increasing sales but decreasing expense to sales ratio- The expense to sales ratio has decreased in last few years. This also indicates a Cartel which is a feature of oligopoly. Group Behavior- The firms in cement industry has shown collusion. In November 2000 all the companies took 35 days maintenance instead of 25 days, put a restriction on distribution and raised prices. This shows a presence of Cartel. Dependence on competitors reaction- In March 2000 prices of cement in all 4 zones of the country went up at more or less the same time. This shows that firms react to competitors strategies Cement Industry: A Cartel In 2007 anti monopoly watchdog of India, MRTPC, issued notices to 14 cement manufacturers in India for following Cartelization. It slammed CMA for increase in prices. Due to lack of evidences it is still not proved to be a cartel. Evidences in favor the presence of cartel Cement manufacturing companies have got a forum of CMA to meet together and discuss marketing strategies, including prices, so as to increase the prices without any fear of competition from other members of CMA. Four Firm concentration ratio as high as 50.5 Sudden jumps in prices in 2000 and 2006. Unwarranted price rise in 2009 even after down real estate industry. Evidences against the presence of cartel No stifling supply to get market power. Low barriers to entry. Presence of very small firms. Consistent capacity utilization.

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3.3 Production & Capacity Utilisation

The official data released by the Cement Manufacturers Association that showed that the monthly production in January-June last year is higher than the previous year.

South accounts for 33.03% of cement production capacity of the country, with Andra Pradesh accounting for 15.27% of the total production capacity of India. It has an installed capacity of around 20mn tons of cement and ranks first in the country, followed by Tamil Nadu with 9.94% of the total production capacity. North accounts for 18.02% of the total production capacity, with Rajasthan at 12.55% of the total production capacity of the country. West accounts for 16.85% of the total production capacity. Maharashtra and Gujarat have production capacity of 6.89% and 9.96% respectively. East and Central Regions account for 16.33% and 15.77% of the total production capacity of the country respectively. Trade between these regions is on a very low scale mainly because of the transportation bottlenecks and uncompetitive cost of transportation. The Southern region dominated the cement consumption at 44.5mn tonnes in FY 07, accounting for about 30% of total domestic cement consumption. During FY 03-07, Southern region has witnessed highest CAGR of cement demand growth at 10.4% followed by Northern and Eastern regions at 8.9% and 9%, respectively.

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Export profiles The export of Indian cement has increased over the years, giving a boost to the Indian cement industry. The demand for cement in the foreign countries is a derived demand, for it depends on industrial activity, real estate, and construction activity. Since growth is taking place all over the world in these sectors, Indian export of cement is also increasing. The cement industry in India has around 300 mini cement plants and 130 large cement plants. The total production capacity of these plants is around 167.36 million tons. The India cement industry is technologically very advanced, as a result of which the quality of Indian cement is now considered the second best in the world. This has given a major boost to the Indian export of cement. The production of cement in India is not only able to meet the domestic demand, but large amounts are also exported. A fair amount of clinker and cement byproducts are also exported by India. As the quality of Indian cement is very good, its demand in the international market is always high. From 2001-2002, till 2007 the cement export posted a steady growth that is from 3.38 million tons to nearly 8 million tones. After that recession affected the Indian cement industry slowing down the growth. Export of India cement has been mostly to the West Asian countries. The ban on cement exports imposed last year has significantly pushed down overall exports of the building material, hitting an eight year low in FY09. The major companies exporting Indian cement are: 1. Gujarat Ambuja 2. Ultra Tech Cement 3. L&T Limited 4. Aditya Cement

Company
ACC Gujarat Ambuja Ultratech Grasim India Cements JK Group Jaypee Group Century Textiles Madras Cements Birla Corp. Lafarge

Installed Capacity(MTPA)
18.64 14.86 17 14.115 8.81 6.68 6.531 6.3 5.47 5.113 5 ICFAI Business School - Hyderabad

Production
17.902 15.094 13.707 14.649 8.434 6.174 6.316 6.636 4.55 5.15 4.573 Page 13

With an installed capacity of around 157 million tons per annum (mtpa) at end-March 2006, large cement plants accounted for 93% of the total installed capacity in India. The installed capacity is distributed over across approximately 129 large cement plants owned by around 54 companies. The structure of the industry is fragmented, although, the concentration at the top is increasing. The fragmented structure is a result of the low entry barriers in the post decontrol period and the ready availability of technology. However, cement plants are capital intensive and require a capital investment of over Rs. 3,500 per tonne of cement, which translates into an investment of Rs. 3,500 million for a 1mtpa plant. The cement industry has witnessed substantial reorganization of capacities during the last couple of years. Some examples of the consolidation witnessed during the recent past include: Gujarat Ambuja taking a stake of 14% in ACC; Gujarat Ambuja taking over DLF Cements and Modi Cement; India Cement taking over Raasi Cement and Sri Vishnu Cement; Grasim's acquisition of the cement business of L&T; Indian Rayon's cement division merging with Grasim; Grasim taking over Sri Dig Vijay Cements; L&T taking over Narmada Cements; ACC taking over IDCOL. Multinational cement companies have also initiated the acquisition process in the Indian cement market. Swiss cement major Holcim has picked up 14.8% of the promoters stake in Gujarat Ambuja Cements (GACL). The extent of concentration in the industry has increased over the years. This concentration is mainly because of the focus of the larger and the more efficient units to consolidate their operations by restructuring their business and taking over relatively weaker units. The relatively smaller and weaker units are finding it difficult to withstand the cyclical pressure of the cement industry. Some of the key benefits accruing to the acquiring companies from these acquisition deals include: Economies of scale resulting from the larger size of operations Savings in the time and cost required to set up a new unit Access to new markets Access to special facilities / features of the acquired company And, benefits of tax shelter.

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3.4 Cost Structure

Capacity Utilization: Since the industry operates on fixed cost, higher the capacity sold, the wider the cost distributed on the same base. But one should also keep in mind, that there have been instances wherein despite a healthy capacity utilization, margins have fallen due to lower realizations. Power and fuel Power and fuel costs constitute 18-22% of cement companies revenues. Indian cement companies largely depend on domestic coal, imported coal and pet coke as a source of fuel. Fuel is primarily used in kilns and CPPs. While CIL raised average prices of coal 10-15% in December 08, international coal and pet coke prices have seen a sharper rise since October 08 (whence international coal up ~60%). This coupled with hardening of bulk freight rates has resulted in substantial rise in landed cost of imported coal. Cement companies such as ACL, ICL and UTCL use imported coal. Lower cost of captive power for both ACL and UTCL would partly offset impact of fuel costs. Other companies such as SCL, Grasim and JKCL that use pet coke are also likely to face steep rise in fuel costs. However, both Grasim and JKCL will manage offsetting this impact through commissioning of CPPs. Companies such as ACC that have high dependence on domestic coal are likely to face lower cost escalation compared with peers. However, due to the current coal shortage, cement companies are entitled to only 70% of the linkages. For the remaining requirement, they have to purchase the fuel from open markets, where costs are 30-40% higher than linkage coal. On account of sufficient reserves of raw materials such as limestone and gypsum, the raw material costs are generally lower than freight and power costs in the cement industry. Excise duties imposed by the government and labor wages are among the other important cost components involved in the manufacturing of cement. Freight costs Freight costs constitute 12-18% of cement companies revenues and depend on lead distances to markets, freight mix between road, rail & sea as well as proximity to source of raw material such as fly ash. Freight costs have also seen rising trend on account of rising diesel prices. ICL has endeavored to minimize international freight rates via purchase of two bulk freight carriers. However, companies are planning to split grinding units located closer to key markets or to fly ash sources to reduce impact of higher freight costs. To reduce the cost of production, the industry is increasing its focus on captive power generation. Proportion of cement production through captive power route has increased over the years. Also, cement movement by rail has increased over the years. It is believed that cost escalations would be easily passed on to consumers, with the scenario of excess supply not likely till FY10E.

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Cost comparison Key cement companies Amongst cement companies in the I-Sec universe, ACC, Ambuja Cement (ACL) and SCL have the lowest per-tonne power & fuel costs. ACCs lower power & fuel costs are on account of high dependence on domestic coal. SCL uses 100% pet coke that has the least ash content and high calorific value, resulting in higher efficiencies. However, whilst most companies are expected to see higher energy costs in FY09 vis--vis FY08, it is expected JKCL and UTCL to register lower energy costs per tonne as benefits of captive power start kicking in. Energy and Transport Requirements The cement industry is dependent on three major infrastructural sectors of the economy coal, power and transport. The inputs from these three sectors account for roughly 50 percent of the cost of cement. Both the availability and the cost of these inputs have a vital bearing of the fortunes of the cement players. All these sectors are largely in the state sector and historically cement companies have had virtually no control on the cost or availability of these inputs. Hence the industry response has largely been in the form of achieving efficiency gains and finding alternatives (captive power and use of water ways). One additional external influencer of the cement industry performance is the taxes imposed by central and state governments. Together these account for 30 percent of the selling price of cement in the Indian context. The shortage in domestic coal production coupled with poor quality has resulted in cement companies resorting to importing coal or going in for open market purchase of coal or using alternative fuel, such as lignite or pet coke. Use of imported coal has become an essential feature of the Indian cement industry and has showed a rising trend during the last few years. Power and fuel costs form the largest proportion of the cost structure. This reflects the effects of the trend in rising global oil and fuel prices. On the other hand employee costs form the smallest proportion of overall costs. This is essentially because cement industry is a very capital intensive industry. This also account for the huge depreciation and interest costs that accrue on the plant and machinery. Moreover the labour employed is essentially semi-skilled, excluding the top management, which brings down labour costs.

3.5 Price Determination

Prices across the country have risen substantially buoyed by the robust demand for cement. Prices have risen by more than 30 per cent during 2008 on an all India basis, with the northern and eastern regions witnessing the highest and lowest growth of 32 percent and 16 per cent, respectively. One of the key factors that seem to have a major say on stock price movements of cement companies are cement prices! Given the volatility and seasonality involved in the same, should ICFAI Business School - Hyderabad Page 16

one place such high weightage on cement prices to ascertain investment decision in cement stocks? Since cement is essentially a commodity, brand premium is almost non-existent in the industry. In terms of value-addition, this sector ranks below even steel and aluminium. It is a highly capital-intensive industry. The Indian cement industry has to be viewed on a regional basis viz. northern, western, southern and eastern. Since demand is unfavorable in certain regions, cement companies that focus on these regions are affected if there is a decline in prices. The Indian cement industry is also highly fragmented with the top six accounting for about 60% of industry capacity. The rest 40% is distributed among 40 small players. The cement industry in India has emerged as the second largest in the world, boasting of a total capacity of around 144 m tons (including mini plants). However, on account of low per capita consumption of cement in the country (110kgs/year as compared to world average of 260kgs) there is still a huge potential for growth of the industry. a retail investor has to keep a tab on demand growth and capacity expansion plans for players. The level of fragmentation and competition also play an important role in determining the prices since the larger the number of players, the more difficult it would be to ensure stability in prices. Institutional sales or big government contracts are normally won through bidding and this can also help determine the level of prices for specific projects. Lastly, cement like any other commodity business is cyclical in nature and hence its realizations also depend upon the position of industry in the business cycle. Today, the prices across the country are going up to unprecedented levels and plants here are able to reach out to faraway places in tune with the demand. As a result, all the cement plants in the state are operating at 100 per cent capacity utilization and with improved bottomlines. The logistic cost for AP companies in meeting the local demand is less compared to other states since cement plants are scattered all over the state. Earlier, the local demand was hardly 30 per cent of the capacity and the prices in other parts of the country were also not attractive due to transport costs. Now, the local demand is more than 60 per cent of the capacity and the prices elsewhere in the country are reaching the viable levels of Rs 180 to Rs 200 per bag. So, now the logistic costs are not coming in the way of AP players to dispatch cement to distant places. Also, as Limestone is available only in some states like AP, we will always enjoy the benefits.

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3.6 Demand & Supply

The demand drivers for the cement sector continue to be housing, infrastructure and commercial construction, etc. We expect the proportion of infrastructure in total demand to improve further in future, as the thrust on infrastructure development is on the rise. During April-November 2007, cement demand grew by 10 per cent year-on-year (y-o-y) propelled by the growth witnessed in end user segments such as housing, infrastructure etc. CRISIL Research expects demand to remain strong and grow by over 12 per cent in the next 2 years.

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Cement demand is expected to outstrip supply for the next year and a half as no major capacities are coming on-stream, thus providing enough flexibility to cement manufacturers to further hike the prices. Today, cement from Andhra is going all over India, including Assam, Meghalaya, Jharkhand, Orissa, West Bengal, Chattisgarh, Gujarat and Maharastra. More cement is likely to flow into Tamil Nadu from the state in view of cut in sales tax. Any further increase in demand in the South India will benefit the cement industry here. Cement movement from Gujarat to Mumbai is also coming down due to exports while cement movement from Orissa into Andhra has stopped and, in fact, cement is flowing into Orissa as well. Earlier in 2006-07, the housing sector alone consumed 65 per cent of the total domestic consumption. With the launch of several infrastructure projects, the housing consumption may come down to 55 per cent as the infrastructure and other sectors are expected to move up to 45 per cent from the present 35 per cent. Still, the main sector of consumption continues to be housing, including commercial space, occupying more than 60 per cent. The current demand in the state for 2005-06 is expected to cross 15 million tons (11.5 million tons). We expect the demand here to go past the 17.5-million mark in 2006-07 in view of irrigation and infrastructure projects being taken up in the state. Weaker sections housing, construction of public toilets, schools in rural areas apart from several private and public infrastructure projects will also give tremendous boost to the cement consumption in the state. Most importantly, irrigation projects, worth nearly Rs 1 lakh crore, will trigger unprecedented demand for the next 5-7 years

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4.PROBLEMS FACED BY CEMENT INDUSTRY IN INDIa

While the industry as a whole was progressing following the changes in price and distribution policy, the problems regarding the infrastructural constraints remained severe. Transportation capacity for either coal or cement did not increase and consequently both high input costs and scarcity of inputs pressured the industry. Many smaller cement plants were set up during that time in order to avoid high transportation costs as well as to reduce capital costs and increase regional development. Thereby, remote areas could be served at reasonable prices within short time periods. Small and mini plants, however, are generally less efficient in terms of input, particularly energy, use. Energy efficient technology, such as pre-stage kilns and waste heat recovery/utilization, cannot economically be provided due to the small scale of production. Coal quality deteriorated further and purchases of high grade coal from open international markets under high concessional import duty had to be taken. Thus, once again the industry suffered from difficult conditions and profit margins even of big companies eroded seriously. Consequently, investment in new and existing capacities slowed down. Technological change in the cement sector was accompanied by an energy using bias. This means that, independent of prices, over time the trend was towards the increased relative use of energy, as reflected for example in the conversion from manual transportation to the use of electrical conveyer belts etc. The development of energy prices is of particular interest in an energy-intensive industry like the cement industry. An increase in energy prices through policy or world market changes would impose relatively higher costs through the nature of the industrys technological progress towards the use of energy. Generally, power is provided by the State Electricity Boards. Yet, problems in power supply, such as frequent power cuts, power failures and low voltage, impose immense problems on the cement industry. Interruption of power affects the industry negatively by causing production losses and low capacity utilization, idle running of equipment during stop and restart of the plant, thermal losses during reheating, damages to refractory etc. Cement companies have therefore started installing captive power to ensure continuous running of process plants and emergency equipment. Sadly the adverse effects of global slowdown have not speared this industry too. Demand is sluggish, the government is keeping an eagle eye on prizes, domestic coal and pet coke, prizes have increased sharply and utilizations rates are down. The numbers coming out are a reflection of grim times. ACC the countrys largest cement company thats controlled by Swiss giant HOLCIM, registered 2% fall in august sales, the biggest fall since Feb. 2007. Production fell by 5%.

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The overheated real estate sector has cooled off now. Considering the financial turmoil witnessed globally, financial institutions have tightened their credit norms. This cautious stance has led to a credit crunch and the same has impacted upcoming projects. On account of general economic slowdown and these issues, the demand for cement has moderated. However, stimulus packages announced by the government and agricultural income gave a fillip to the demand for the commodity The Other challenges faced by the Indian Cement Industry are: High Transportation Cost is affecting the competitiveness of the cement industry. Freight accounts for 17% of the production cost. Road is the preferred mode for transportation for distances less than 250km. However, industry is heavily dependant on roads for longer distances too as the railway infrastructure is not adequate. Cement industry is highly capital intensive industry and nearly 55-60% of the inputs are controlled by the government. There is regional imbalance in the distribution of cement industry. Limestone availability in pockets has led to uneven capacity additions. Coal availability and quality is also affecting the production. Cement is the most heavily taxed construction related commodity. With a complex three tier excise structure, various government levies and taxes taken together constitute over 60 percent of the ex-factory price. The government has done nothing in the form of reduced excise duty or abatement despite industry hopes for a more rationalized tax structure. Zero import duty on imported cement initially reduced prices drastically and now is putting downward pressure on prices in certain regions where demand has slumped and new capacity has come on board.

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5.GOVERNMENT POLICIES
Government initiatives in the infrastructure sector, coupled with the housing sector boom and urban development, continue being the main drivers of growth for the Indian cement industry. Increased infrastructure spending has been a key focus area over the last five years indicating good times ahead for cement manufacturers. The government has increased budgetary allocation for roads under National Highways Development Project (NHDP). Appointing a coal regulator is looked upon as a positive move as it will facilitate timely and proper allocation of coal (a key raw material) blocks to the core sectors, cement being one of them. Government Policies have effected the growth of cement plants in India, in various stages. The control on cement for a long time and the partial decontrol and then total decontrol has contributed to the gradual opening up of the market for cement producers. The stages of growth of the cement industry can be best described in the following way: Price and Distribution controls (1940-1981) During the World War II cement was declared as an essential commodity, under the Defense of India Rules and was brought under price and distribution controls which resulted in sluggish growth. The installed capacity reached only 27.9 MT by the year 1980-81. Partial Decontrol (1982-88) In February 1982, partial decontrol was announced under this scheme, levy cement quota was fixed for the units and the balance could be sold in the open market. This resulted in extensive modernization and expansion drive, which can be seen from the increase in the installed capacity to 59 MT in 1988-89 in comparison with the figure of a mere 27.9 MT in 1980-81, an increase of almost 111 percent. Total Decontrol (1989) In 1989, total decontrol of the cement industry was announced, by doing this government relaxed the forces of demand and supply. In the next two years the industry enjoyed a boom in sales and profits and by 1992 the pace of overall economic liberalization had peaked, ironically, however the economy slipped into recession, taking the cement industry down with it. For 1992-93 the industry remained stagnant with no addition to existing capacity. The things that primarily controlled the price of cement are coal, power tariffs, railway, freight, royalty and cess on limestone. Interestingly all these prices are controlled by government.

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Incentives: Most state governments in order to attract investments in their respective states, offer fiscal incentives in the form of sales tax exemptions/deferrals. In some states this applies only to intrastate sales like MP and Rajasthan. States like Haryana offer a freeze on power tariff for five years, while Gujarat offers exemption from electrical duty. Opening up the FDI channel: The government of India has allowed foreign direct investment up to 100% in the cement and gypsum products industry of the country. This has led to the increase in FDI Inflows to Cement and Gypsum Products industry in India. Amount of FDI inflows to cement and gypsum products industry in India The cumulative FDI equity inflow since August of 1991 till January of 2009 has been well in excess of Rs.4 lakh crores with almost a quarter of it coming in the period of 2008-09. The third quarter of 2008 saw the least amount of inflow with November and Decembers cumulative inflow close to a third less than the inflow in May 2008 alone and half of what was acquired in February 2008, a time when the global recession was in full swing and terrorism in India ruled the roost. However, things are looking up in 2009, wherein the revision of the FDI definition has garnered an influx of investments. So far in 2009 the Gross inward FDI as US$ 31.7 billion channeled mainly into manufacturing. International companies having presence in cement and gypsum products industry in India are: Lafarge, Italcementi, Heidelberg Cements, Holceim. FDI inflows to cement and gypsum products in India have boosted the industry: The increased FDI Inflows to Cement and Gypsum Products industry in India has led to the growth, expansion, and development of the industry. As a result of this the quality of the cement and gypsum products has improved a great deal. Financial Budget 2009 - 2010 In the budget, while the government refrained from lowering the burden of taxes and duties on cement, it imposed customs duty of 7.5% on RMC cement. Imposition of 7.5% customs duty on concrete batching plants is likely to negatively impact the ready mix concrete manufacturers. However, it wont have a severe impact as RMC constitutes not more than 5% of total cement consumption. The government has increased budgetary allocation for roads under NHDP. Further, with more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit. The budget measures such as increasing excise duties

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have proved to be futile and in the future too, we believe that it is the market dynamics that will determine these variables. Overall the budget proved a disappointment for the cement industry. The cement industry is one of the highly taxed industries, with a complex 3-tier excise structure. All the government levies and taxes considered together would constitute over 60 percent of the ex-factory price. The industry has been hoping for rationalisation of these tax structures along with other measures in order to maintain its competitiveness. Apart from the excise duty, other taxes on it include duties on power tariff, a sales tax, royalty and cess on limestone, coal and gypsum. The cement industry wanted a uniform rate of excise duty to be levied on cement. with an abatement of 55% for cement in line with the suggestion made by NCAER. Lower excise duty and abatement on it would have enabled the industry to pass on the benefit to the final consumer. It is predicted that a price reduction of around Rs 18-20 per 50 kg bag is possible, with abatement. Presently, the average price of cement across the country is around Rs 240-245 a bag, suggesting prices could fall 7-8 per cent to around Rs 225-230 a bag. However the budget failed to make good on their expectations. In order to control inflation the government had allowed duty free import of cement, which then reduced the domestic price of cement. Now as the domestic capacity addition started coming on stream and a surplus situation exists in some regions of the country the industry is seeking the imposition of import duties on cement again. Although the government has reimposed CVD and SVD on import of cement, the cement industry further desired an import duty of 12.5 per for imported cement, that never materialized. From the perspective of input costs the industry has been heavily relying on imported coal, PET coke and gypsum due to poor domestic availability of these important inputs. Currently PET coke, coal and Gypsum have an import duty of 5 per cent imposed upon them whereas the finished cement attracts zero import duty. Thus the cement industry had hoped the government would make amends for this by removing the import duty on important inputs like coal, PET Coke, and Gypsum so that the established principle that import duty on inputs should not be higher than on finished products would be adhered to. This too did not come to fruition though, placing further pressure on the industry as it feels pressure from a declining real estate sector.

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PORTERS 5-FORCE MODEL FOR CEMENT INDUSTRY

Threat of New Entrants: The high capital costs acts as a major entry barrier for the entry of new players. The high freight costs make it difficult to import cement. Cement being a high volume low value commodity results in high freight costs, which makes cement imports economically unfeasible. Domestic Cement industry is highly insulated from global cement markets. With GoI intervention, making cement duty free, cement is being imported from neighboring countries. However, due to logistics issues and lack of port handling capabilities, imports of cement will remain negligible and do not pose a threat to domestic industry. Bargaining power of Suppliers: The major inputs are coal and power. The Prices of both coal and power are determined by the government. To mitigate the high costs of power the cement players have set up captive power plants. Competitive rivalry between existing players: Previously the rivalry was strong among the players, as the industry was not consolidated. During the last few years the industry has become more consolidated with the Top 3 players having a combined market share of 49 percent in 2005-06 as compared to 32 percent in 19992000. ICFAI Business School - Hyderabad Page 25

Bargaining power of Buyers: Retail sales constitute about 80 percent of the total sales and the rest is institutional sales. The retail buyers dont have any bargaining power while the institutional buyers get a discount of 5 to 10 percent as they buy cement in bulk. Threat of Substitutes: There are no good substitutes for cement.

6.SWOT ANALYSIS
Strengths: Double digit growth rate.
Cement demand has grown in tandem with strong economic growth; derived from: Growth in housing sector (over 30 percent) key demand driver Infrastructure projects like ports, airports, power projects, dams and irrigation projects. National Highway Development Program Bharat Nirman Yojana for rural infrastructure. Rise in industrial projects. Export potential also demand drive. Capacity utilization over 90 percent.

Weakness: Low value commodity

Cement industry is highly fragmented Industry is also highly regionalized. Low value commodity makes transportation over long distances uneconomical.

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Opportunities: Demand-supply gap

Substantially lower per capita cement consumption as compared to developing countries (1/3 rd of world average) Per capita cement consumption in India is 82 kgs against a global average of 255kgs and Asian average of 200kgs.

Additional capacity of 20 million tons per annum will be required to match the demand Limited green field capacity addition in pipeline for next two years, leading to favorable demand supply scenario.

Threats: Rising input costs

Government intervention to adjust cement prices Possibility of over bunching of capacities in the long term as some of the players have already announced new capacities Transportation cost is scaling high; bottleneck due to loading restrictions Coal prices climbing up; industry players say current shortage of coal in the country is estimated to be over 10 million tonnes.

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7.CONCLUCION
The industry is likely to maintain its growth momentum and continue growing at around 8% to 9% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main drivers of growth for the industry. The cement sector surprised with better growth in demand, despite sluggishness in the real estate sector. The industry has been aggressively pursuing expansion (brown field & green field) during the past few quarters. Capacity of cement production in the country is expected to increase to 298 million metric tonnes by the end of the fiscal year 2012. The current demand has remained relatively strong due to strong rural housing demand as well as infrastructure spending in semi-urban areas.. In the recent past, demand has surpassed supply, resulting in healthy cement prices across the country. However, this scenario is likely to reverse as the industry has lined up huge capacity expansion plans. Cement producers had put into place capacity expansion plans either by Brownfield or Greenfield expansion route to meet expected growth in demand. The industry, which has grown by an average of 10 per cent in the last three years, is expected to add around 45 million tonnes of fresh capacity in FY2010, taking the overall capacity to over 260 million tonnes per annum. As the capacities become operational, which has started taking place in some regions, supply may outstrip demand and thus the industry would experience lower capacity utilization and lower pricing power. Temporary reliefs may be provided if there are delays in any of the proposed expansion plans. While infrastructure spending has been a boon, there was also a strong cushion from the steady growth of the construction sector (read housing). However, recently the demand has slowed down as real estate and construction activities in the urban areas have taken a back seat with economic slowdown. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60%-70% of the countrys cement. If this support wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the hike in prices of coal and petroleum products could impact cement companies margins. Good agricultural income has supported demand for the commodity despite slowdown in real estate sector. Going forward, we believe the governments initiatives in the infrastructure and housing sectors are likely to be the main drivers of growth for the industry in the long run.

The cement industry is expected to grow steadily in 2009-2010 and increase capacity by another 50 million tons in spite of the recession and decrease in demand from the housing sector. The industry experts project the sector to grow by 9 to 10% for the current financial year provided India's GDP grows at 7%. India ranks second in cement production after China. Page 28

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The major Indian cement companies are Associated Cement Company Ltd (ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd and Madras Cement Ltd. The major players have all made investments to increase the production capacity in the past few months, heralding a positive outlook for the industry. The housing sector accounts for 50% of the demand for cement and this trend is expected to continue in the near future.

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2. Bibliography
Ritu Raj Arora and Runa Sarkar, Detecting Cartels in the Indian cement industry: An Analytical Framework, Industrial and Management Engineering Department, IIT Kanpur http://www.equitymaster.com/research-it/sector-info/cement/ ICICI Securities, Cement Sector, April 21, 2008. Trade chakra, Cement Industry, March 2009. Chandan Kishore Kant, Cement industry seeks support in next Budget, Business Standard, September, 2009. Indian Cement Industry,www.researchandmarkets.com,2008. Indian Cement Industry Forecast to 2012, Industry Research Solutions, June, 2009. http://www.energymanagertraining.com/cement/Cement_india.htm http://www.indiainbusiness.nic.in/industry-infrastructure/industrial-sectors/Cement.htm www.acclimited.com/ www.gujaratambuja.com/index1.html http://edelweiss.in/ http://www.energymanagertraining.com/cement/Cement_india.htm http://www.indiamarkets.com http://www.ibef.org/industry/cement.aspx http://www.financialexpress.com/news/top-four-cement-cos-market-share-dips/415855/ http://www.expressindia.com/latest-news/builders-lash-out-at-cement-cartel-for-jacking-upprices/447523/ http://business.mapsofindia.com/india-gdp/industries/cement.html http://www.thehindu.com/2005/11/03/stories/2005110301911900.htm http://business.mapsofindia.com/fdi-india/sectors/cement-gypsum-products.html http://news.indiamart.com/news-analysis/swiss-cement-giant-g-8744.html http://economictimes.indiatimes.com/News/News-By-Industry/Indl-Goods-Svs/Cement/Cement-despatches-grows-998-pc-in-Apr-production-up-1006pc/articleshow/4385636.cms http://www.eksporttilindien.um.dk/en/servicemenu/News/Infrastructure/CementSectorHopes ToKeepDespatchMomentumGoing.htm http://www.business-standard.com/india/storypage.php?autono=355823 Opportunities and Trends in the Indian Cement Industry, Research and Markets, January 2009.

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