The Cement Industry in India: Growth, Costs, and Future Prospects

The cement sector plays a pivotal role in the Indian economy, serving as a backbone for infrastructure projects, residential construction, and urban development. Notably, India stands as the second-largest producer of cement in the world, with Indian companies often recognized among the greenest manufacturers globally.

Understanding the Cement Manufacturing Process

To comprehend the dynamics of the cement sector, it is essential to appreciate the manufacturing process. Cement production starts with the creation of clinker, a key intermediate product. This process involves heating limestone—a type of sedimentary rock—along with clay at extremely high temperatures. The resultant clinker is then ground with gypsum and fly ash to form the fine powder known as cement. This process is consistent across the cement manufacturing industry, influencing how companies operate, make decisions, and manage costs.

Key Cost Drivers in Cement Production

When analyzing the financial aspects of cement manufacturing, three major costs emerge: raw material cost, power and fuel cost, and logistics cost.

1. Raw Material Cost: Typically, raw material costs account for 15-20% of the total cost of cement production. Limestone is the most critical raw material. Therefore, cement companies often secure long-term leases on limestone mines from the government to ensure a steady supply for their factories. However, regulatory changes since 2015, which introduced auctioning for mine leases with a 50-year term, could potentially increase costs, especially for companies that have already established their production facilities near existing mines. Any changes in lease agreements could lead to significant cost increases if competitors bid for these resources in the future.
2. Power and Fuel Cost: This cost forms a substantial part of the overall expenditure, ranging from 30-35%. Most cement factories in India primarily rely on coal as their main power source. Consequently, companies like Ambuja and UltraTech maintain their own coal mines, ensuring a consistent supply while also lowering costs. However, the geographical distribution of coal mines is uneven, with many concentrated in the eastern states of India. This disparity leads to regional variations in power costs, further complicating the operational landscape for cement companies.
3. Logistics Cost: This cost often constitutes around 25-30% of total sales cost. The high logistics expenses arise mainly because cement is a low-value, high-volume product sold in bulk. The unique challenges of transporting this bulky material, which has a relatively short shelf life of about 90 days, underscore the need for proximity to both resources and customers. To combat these challenges, some companies are transitioning from integrated plants—where all processes occur at the same site—to split grinding units, allowing for more efficient logistics and production strategies.

The Competitive Landscape: Mergers and Acquisitions

With several ongoing mergers and acquisitions shaping the landscape of the cement industry, the competition is heating up. In recent years, prominent deals have seen players like the Aditya Birla Group's UltraTech Cement acquiring India Cements, while Adani's Ambuja Cement has taken significant strides buying companies such as Orient and Pena Cements. Such strategic moves raise essential questions about market dynamics and the motivations behind these acquisitions.

Mergers and acquisitions provide companies with a faster route to address the barriers to entry in the market—such as resource access and distribution networks—allowing for quicker expansion in existing markets. Furthermore, the cyclical nature of the cement industry, influenced by economic factors such as interest rates and government spending on infrastructure, adds another layer of complexity.

Moreover, consolidation in the cement space tends to occur every 7-8 years. This isn’t a new phenomenon; it has been happening since the 1990s when Ambuja acquired DLF and Modi Cements, and Lafarge acquired Tata Steel's cement business. In 2016-2017, this cycle of mergers and acquisitions repeated itself again. In the last nine years, there have been 15 mergers and acquisitions in this sector.?

As per the recent merger deals, the average cost is lower than that of setting up an integrated greenfield cement plant, which has provided cost savings in CAPEX for cement companies. As an analysts I believe this is another major reason for M&A activity is intense competition. The Adani Group and Birla Group are competing for the larger market share of cement. In southern states, the cement industry is growing rapidly, and both groups have begun to solidify their position here.

For instance, the Adani Group acquired Sanghi Industries through Ambuja Cements. Sanghi had been struggling, facing significant debts and compliance issues, leading to cash flow problems and resulting in losses. Taking advantage of this situation, the Adani Group acquired Sanghi Industries, which enhances their market share in the western and southern regions. Additionally, they acquired Pena Cements for ?10,422 crores, adding 14 million tons per annum of production capacity to Adani Group's portfolio, bringing their total capacity to 89 million tons per annum.

Analysts suggest that this acquisition will further improve their market share in the cement market by approximately 2% nationwide and by an additional 8% specifically in the southern Indian market. This acquisition will also provide Adani with access to the Sri Lankan market through sea routes, helping them expand their presence in Kolkata, Gopalpur, Karaikal, Kochi, and Colombo, and enabling them to better serve the Peninsular India region.

On the other hand, as a counter to Adani's moves, the Birla Group's UltraTech Cement has also been making significant acquisitions. They recently acquired India Cements, which will boost their capacity from 15 to 16 million tons per annum. If we discuss the latest updates, two key developments come to mind: first, UltraTech acquiring Orient Cement, which will increase Adani's capacity to 88.5 million tons per annum. Secondly, Adani has shown interest in acquiring Heidelberger Materials, a German MNC with about 14 million tons capacity in India, which will further increase their market share.

Both groups have strong future growth plans. UltraTech is targeting a capacity of 200 million tons per annum by 2026-27, while Adani aims for a capacity of 140 million tons per annum by 2028. This creates an interesting dynamic in the cement sector, reminiscent of a movie-like scenario where two major players are fighting for market share. The intensity of competition shows that both players have stakes to protect, indicating a promising outlook for the future of the cement industry.

The Future of Cement: Trends and Expectations

Looking ahead, the future of the cement industry in India appears promising. With the government actively supporting housing and infrastructure projects through initiatives like the PM Awas Yojana, demand for cement is poised to rise significantly. This initiative has allocated substantial resources for developing affordable housing and national highways, further driving the consumption of cement.

Currently, approximately 60% of cement demand originates from the housing sector, with 20% coming from infrastructure and the remaining 20% from commercial sectors. As urbanization continues to grow, and with an increasing economy, the demand dynamics suggest a bright outlook for cement consumption.

However, there are challenges to be aware of. As economies mature, the growth potential for cement consumption may start to decline, potentially leading to a decrease in the cement-to-steel consumption ratio. Presently, India's ratio is notably high at around 3:1, indicating plenty of room for growth as infrastructure develops.

Innovations and Value-Added Products

In response to market demands, cement companies are exploring the introduction of value-added products to enhance profit margins. One such product is ready-mix concrete (RMC), which is not only a convenient solution for construction sites but also offers higher profitability compared to traditional cement. Companies like UltraTech Cement are leading the charge in the RMC segment, operating approximately 100 plants across 35 cities in India. Similarly, Shree Cement is taking steps to enter this market, showing that there is a concerted effort among industry players to diversify their product offerings and meet evolving consumer needs.

Another innovative product gaining traction is white-topping, a type of concrete that can extend the lifespan of roads by up to 20 years. This technology has found its application in various government initiatives, including the Prime Minister's Gram Sadak Yojana, aimed at enhancing rural connectivity. Use of white-topping technologies for repairing highways is also being proposed by the Ministry of Road Transport and Highways, showing a growing recognition of the benefits this innovative approach offers.

The Environmental Aspect

Alongside economic growth and product diversification, there is an increasing shift towards sustainability within the cement sector. Indian cement companies now rank among the greenest in the world, with a strong emphasis on reducing carbon footprints and increasing the use of renewable energy. Companies like Shree Cement are leading this initiative with significant investments in solar and wind energy, which are expected to constitute 40-42% of their total power mix by the end of the current financial year. This transition not only contributes to lowering operational costs in the long run but also enhances the overall image of the industry amidst global concerns over climate change.

Conclusion: A Bright Horizon for the Cement Sector

As of 2023, the cement sector's market size reached nearly 4 billion tons and is projected to expand to around 6 billion tons by 2032—an impressive growth of 1.5 times in just under a decade. The Indian cement industry stands at a crucial juncture characterized by promising growth potential, rapid innovations, and a strong focus on sustainability. As it pushes towards sustainable practices and supply chain optimization, it presents opportunities for both established players and new entrants. The interplay of mergers and acquisitions alongside expanding market demands creates a competitive dynamic that could redefine how cement is produced and consumed in the years to come.

Embracing innovation, improving infrastructure, and maximizing resource efficiency will be key to sustaining growth in this vital sector. As construction projects continue to rise, the cement industry will remain a cornerstone of economic development, providing the necessary materials to build a better future for India.

In summary, the cement industry in India is not just about producing a construction material; it is an integral part of the country’s economic fabric. With encouraging projections for growth, ongoing innovation, and a commitment to sustainability, the journey ahead promises to be transformative. Whether one is an investor, practitioner, or student, understanding the dynamics of this sector will be crucial in navigating the complexities of the market and contributing to its advancements.