March 6, 2018

Cement Industry Analysis

ALWAYS – INVEST IN WHAT YOU KNOW & WHAT YOU CAN UNDERSTAND. DEVELOP CURIOSITY AS A TRAIT

 

Must know facts:

  • India is the second largest cement producer in the world, with cement production capacity of nearly 420 million tonnes, as of July 2017.
  • The housing sector is the biggest demand driver of cement, accounting for about 67 per cent of the total consumption in India. The other major consumers of cement include infrastructure at 13 per cent, commercial construction at 11 per cent and industrial construction at 9 per cent.
  • The raw materials needed to produce cement (calcium carbonate, silica, alumina and iron ore) are generally extracted from limestone rock, chalk, clayey schist or clay. Suitable reserves can be found in most countries. These raw materials are extracted from the quarry by blasting. So note for changes in availability of these raw materials, that will have an impact on cement pricing as well.

 

Influencing Factors for price change:

  1. Understand the usual life cycle that goes into making of cement, any changes availability/price of those raw materials will certainly have an impact on the overall pricing & margins of companies as well.
  2. Also understand cement industries is still in labour intensive phase, so availability of cheap labour is an important parameter. Other factors such as – cost of power, Fuel cost, Freight & Forwarding Charges, Excise Duties – directly proportional to finance outgo & total cost of ‘Lafarge’ are important measures that influences cement sector extensively.
  3. Cement sector can be benchmarked against – NIFTY REALTY index to a certain extent, as it provides a dipstick for one to understand, if there is upsurge in Cement stocks – is it due to good sentiment in Realty sector or wise versa for a down move. Also i would suggest to keep a tab on movement of S&P BSE Basic Materials index, it helps to understand the basic demand/supply scene in the industry.
  4. When you decide to invest on individual cement stock, understand what kind of demand it is catering that is getting money on to its balance sheets ?  if the company is totally export/import reliant, if domestic – then is it North India alone or south India as well & in which region is the real demand / growth that is expected.

 

Understanding the Industry:

India’s cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors.

India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major c such as development of 98 smart cities are expected to provide a major boost to the sector.

Expecting such developments in the country and aided by suitable government foreign policies, several foreign players such as Lafarge-Holcim, Heidelberg Cement, and Vicat have invested in the country in the recent past. A significant factor which aids the growth of this sector is the ready availability of the raw materials for making cement, such as limestone and coal.

Manufacturing Process: (Any change/availability in components can lead to change in price, hence manufacturing process is illustrated here)

Step 1: Extraction of raw materials

The raw materials needed to produce cement (calcium carbonate, silica, alumina and iron ore) are generally extracted from limestone rock, chalk, clayey schist or clay. Suitable reserves can be found in most countries. These raw materials are extracted from the quarry by blasting. They are then crushed and transported to the plant where they are stored and homogenized.

Step 2: Raw grinding and burning

Very fine grinding produces a fine powder, known as raw meal, which is preheated and then sent to the kiln. The material is heated to 1,500°C before being suddenly and dramatically cooled by bursts of air.  This produces clinker, the basic material required for the production of all cements.

Step 3: Cement grinding and shipping

A small amount of gypsum (3-5%) is added to the clinker to regulate how the cement will set. The mixture is then very finely ground to obtain “pure cement”. During this phase, different mineral materials, called “cement additives”, may be added alongside the gypsum. Used in varying proportions, these additives, which are of natural or industrial origin, give the cement specific properties such as reduced permeability, greater resistance to sulfates and aggressive environments, improved workability, or higher-quality finishes.

Finally, the cement is stored in silos before being shipped in bulk or in bags to the sites where it will be used.

 

Estimated Market Size:

India’s total cement production capacity is nearly 425 million tonnes, as of September 2017. The growth of cement industry is expected to be 6-7 per cent in 2017 because of the government’s focus on infrastructural development. The industry is currently producing 280 MT for meetings its domestic demand and 5 MT for exports requirement. The country’s per capita consumption stands at around 225 kg.

The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70 per cent of the total cement production of the country. A total of 210 large cement plants account for a cumulative installed capacity of over 350 million tonnes, with 350 small plants accounting for the rest. Of these 210 large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu.

Industry to grow at 5-6 per cent CAGR between FY17 – FY20. Capacity addition of 109 million tonnes per annum (mtpa) between 2013-16.Total installed capacity of 420 million tonnes as of June 2017. Domestic consumption to outpace supply in next three fiscals.

 

Road Ahead:

The eastern states of India are likely to be the newer and virgin markets for cement companies and could contribute to their bottom line in future. In the next 10 years, India could become the main exporter of clinker and gray cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country.

A large number of foreign players are also expected to enter the cement sector, owing to the profit margins and steady demand. In future, domestic cement companies could go for global listings either through the FCCB route or the GDR route.

 

–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
Looking for an investment advice – Click here!

 

Top Stocks in the industry:

UltraTechCement, Shree Cements, Ambuja Cements, ACC, Ramco Cements, India Cements & many more.

(Please note above stocks are not recommendations, they are purely for information purpose only)

Information Source / References: DIPP, CRISIL,The Economic Survey 2016/17 & 17/18, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports, IBEF.

 

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