India: A new global cement leader in the making

Cement companies in India continue to expand their capacity as demand for their product increases, paving the way to their leadership in the global cement market. Despite their competitiveness, companies face some challenges in affirming themselves in the global market, as the ongoing trade conflicts sweeping Asian markets pose both opportunities and risks.

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India has secured its place as the second largest global cement producer, with its capacity reaching 502 million tons in 2018, and being expected to touch close to 550 million tons by 2020, although it remains quite far from China's 3.2 billion tons, according to figures released by the India Brand Equity Foundation. However, as China continues to deploy a capacity rationalization strategy and is focused on shutting down outdated production lines, India, with its expanding output, is in line to catch up to the global leader. Nevertheless, India's current expansion plans do not foresee a surge in capacity up to the Chinese levels in the near to medium term.

As India is still developing key infrastructure in order to accommodate a booming population, and the housing challenges that come with it, cement demand is overall strong, having grown at a strong two-digit pace for most of the past decade. And while growth for the 2020 financial year is expected to be more subdued, it is still forecast to touch a healthy eight percent, as the government resumes construction spending after a decrease caused by the election in April.

Source: CW Research's Global Cement Volume Forecast Report 2H2019

A private affair

India's cement market is largely in the hands of private companies, which are aiming to expand via consolidation and take over smaller producers, with fourteen acquisitions taking place in the sector in 2017. In 2018, market leader UltraTech also boosted its capacity by fourteen percent to a total of 100 million tons after acquiring the cement business of Century Textiles and Industries, as part of its aggressive growth strategy, which has consolidated a significant part of the country's cement industry.

The market is highly competitive, and prices tend to vary wildly across regions, affecting companiesÔÇÖ margins, especially as supply is high, and transportation constraints weigh on their profitability. Price volatility is especially strong during the monsoon season, when construction activity is hindered by strong rains. Currently, prices are stronger in the North and South, as the government has resumed key infrastructure projects in the area, but in the East and Central regions, more allocations of housing units under government programs should incentivize further growth in the construction sector as well.

Meanwhile, manufacturers have also begun to grow their business overseas by exporting to nearby foreign markets, with neighboring countries in particular such as Bangladesh, Sri Lanka and Nepal proving good offloading opportunities for companies seeking to secure new growth. Other popular export markets are located within Asia, Africa's East Coast and the Middle East, the latter of which has also become a preferred place of investment, the United Arab Emirates in particular, with UltraTech acquiring a cement plant there after its acquisition of Binani, and JSW Cement considering an investment in the area.

In order to continue to perform positively and see their market share expand not only in India but in other markets, companies face many challenges, but the overall base for growth is laid down, and just needs to be appropriately taken advantage of.

Challenges to growth

The most pressing issues begin at the manufacturing process stage, as prices of fuel and some raw materials are higher than some of India's neighbors, while capacity utilization is, on average, low. The manufacturers mainly use coal and petcoke or fuel oil to power their operations, although the logistics costs severely weigh in on plants more located to the interior of the country.

One of the largest obstacles to overcome is tied to the procurement of these materials, as the domestic coal supply faces many constraints due to the high demand and logistics issues, especially as this is mostly handled by the state, with very little openings for private companies. And while some benefit from captive coal mines, thus able to mine and provide their own fuel, others rely on imported coal, a commodity whose price is highly volatile. Petcoke supplies are also mostly acquired from foreign sellers, due to the tight domestic supply, with many manufacturers preferring this fuel due to its favorable pricing and high calorific content, but governmental authorities have banned it in certain areas as it is more polluting when compared with coal.

India's transport network poses a large problem for suppliers as well, either for domestic shipments or foreign ones, as railways tend to be packed, roads are in need of maintenance and expansion into some areas, and the port infrastructure is also lacking both in volume and quality. However, the government is currently investing in these segments, with improvements expected in the following decade.

While many of the concerns can be addressed by the companies, the export outlook is currently severely weighted towards the downside due to the many trade conflicts or political tensions around the region, which could be a source of further challenges for the industry, or even opportunities.

An emerging titan

By far, one of India's main boosts for growth is its sheer size, both in geographic and demographic terms. Estimated to surpass China as the most populated country by the end of the century, and to reach a population of 9.7 billion people in 2050, India's government has an ongoing effort to develop more infrastructure and housing in order to accommodate the needs of its booming people, especially as it is still working on key infrastructure such as power and water supply in many of its states.

This is expected to continue to fuel cement demand in the coming decades, providing a strong incentive for companies to expand their capacity in order to meet these needs, and to make their pricing as competitive as possible with other manufacturers in the region, which are currently looking to make way in the Indian market for their cheaper products.

The country's proximity to emerging markets is a boon to the industry as well, as India's products are well priced to supply infrastructure construction in countries such as Sri Lanka and Nepal, which currently are the two highest importers of Indian cement.

Cement products made in India are typically blended with industrial byproducts and waste such as granulated slag and fly ash, making them more environmentally friendly. Demand for these types of products is growing in advanced economies, making it a possible market for India's manufacturers in the future.

Conclusion

India's emergence into a developed economy and global power over the next decades, if its growth stays in line with analystsÔÇÖ expectations, is the main catalyst for the cement industry's growth, as the overall needs call for a revamp of the country's infrastructure. If India's expansion proves to be as booming as China's, then its industry could even surpass the top cement producer.

While challenges for the future are mounting, the cement industry's current placement is on the growth path. The government's many infrastructure projects and housing programs, the continuing development of the transport network and improvement of logistics are the main points of growth in the next few years, while the outlook for fuel and raw materials supply, as well as the ongoing trade tensions, is muddled.

However, the government is currently expanding its coal operations and attributing more mines to companies in order to help them meet their energy needs, helping to offset the existing gap. As for the trade tensions, India could stand to benefit from surfacing rivalries between powers such as China and the US or South Korea and Japan shunning products from these markets and becoming more open to imports from other countries.

This interview originally appeared on CemWeek Magazine #51