Background 

Cement is one of the most vital basic industries after Petroleum and Steel for any economy, particularly so, for an emerging economy like India's where infrastructure and housing activities are taking place at a fast pace. It is an important construction material with virtually no substitute, and is used worldwide for all construction work. It is a heavily taxed commodity and the duties amount to around 30% of the selling price of cement and as such,  is a significant contributor to the revenue collected by both the central and state governments. 

Cement has been one of the important basic sectors which has not been dominated by the State sector in the post-independence development strategy. The share of the public sector in cement production has been declining throughout. The share of the public sector companies has been estimated at less than 2% in FY2005 as compared to 6.5% in FY1996.  

The production of cement during the year 2006-07 is estimated at 162 million tonnes. Cement production during the year 2006-07 (April to December, 2006 – 9 months) has been 117.37 million tonnes registering a growth of 9.87 per cent over the corresponding period of 2005-06. India also exported 6.07 million tonnes of cement and clinker during April-December, 2006 (higher than previous years). Because of increased overseas demand, cement exports increased from 4.07 mt in FY2005 to 6.01 mt during FY2006.

Size 

• The cement industry accounts for approximately 1.3% of GDP and employs over 0.14 million people.
• India is the second largest manufacturer of cement in the world behind China (934 mt). The cement industry comprises 129 large cement plants with an installed capacity of 165.10 million tonnes and more than 206 operating mini cement plants with an estimated capacity of 11.10 million tonnes per annum, making a total installed capacity of 176.20 million tonnes.
• Some of the major projects commissioned during FY2007 include Dalmia Cement (Tamil Nadu expansion from 1.23 mtpa to 3.5 mtpa), ACC (Himachal Pradesh expansion from 3.52 mtpa to 4.40 mtpa), and JK Group (Nimbahera, Rajasthan expansion from 2.8 mtpa to 3.3 mtpa). There are an estimated 88 upcoming cement projects with an estimated investment of Rs. 224 billion which are estimated to bring about an additional capacity addition of 11.6 mtpa during FY2008, 18.2 mtpa during FY2009, and 24.6 mtpa during FY2010. 

Structural Characteristics 

• Growth in the construction industry has a direct relation with the production and consumption of cement. GDP growth from the construction industry in the last three years—12.1% during FY2006, 12.5% during FY2005, and 10.9% during FY2004—has boosted cement consumption by 10% during FY2006, as against 8.1% during FY2005, and 5.8% during FY2004.
• As such the capacity utilisation increased from 81% in FY2004 to 84% in FY2005, and to around 88-89% in FY2006. The excess supply in the industry had prevented full capacity utilization for the industry during the last few years.
• The structure of the industry is fragmented, although, the concentration at the top is increasing with around 54 companies operating with around 129 plants. The large players account for 93.3% of total capacity who are focussing to consolidate their operations by restructuring their business and taking over relatively weaker units. The fragmented structure is a result of the low entry barriers in the post decontrol period and the ready availability of technology.
• The 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 one million tonne plant.
• The location of limestone reserves in select States has resulted in the Indian cement Industry evolving in the form of clusters. Cement is a high bulk and low value commodity, and as such, proximity to limestone deposits contributes considerably to pushing down the costs of transportation of heavy limestone.
• Seven clusters—Satna (Madhya Pradesh), Chandrapur (North Andhra Pradesh and Maharashtra), Gulbarga (North Karnataka and East AP), Chanderia (South Rajasthan + Jawad & Neemuch in MP), Bilaspur (Chattisgarh), Yerraguntla (South AP), and Nalgonda (Central AP)—account for around 51% of total cement production in India.
• Cement prices vary on a regional basis which is a function of local demand supply position. The major consumption states for cement in India include Maharashtra (16.8 mt in FY2006), UP (14.2 mt), Andhra Pradesh (11.5 mt), and Tamil Nadu (11.1 mt).

Mini Cement Plants (MCPs)

• The MCPs had an installed capacity of 11.1 million metric tonnes (mt) as on March 31, 2005, accounting for 6.7% of the total installed capacity of the cement industry in India. MCPs  have been set up in dispersed locations across India, so as to reduce transportation as well as capital costs, to increase regional development and to make use of smaller limestone deposits.
• Against the requirement of Rs. 3,500+ per tonne of capacity of large plants, capital costs for mini-cement plants come to about Rs. 1,400-1,600 per tonne. However, they suffer from factors like diseconomies associated with small-scale operation, significant competition from large-scale units and rising cost of production.  

Policy

• The government has also accorded significant importance to the housing and infrastructure sectors which gives impetus to this sector.
• The working group on cement for the formulation of the 11th Plan seeks regulatory support for creating framework for co-processing of wastes, co-generation of power and enhanced support to R&D Activities to align the technology regime with the best of the world. The report also emphasises the importance of bulk cement transportation, use of ready mix concrete and reduction of taxes and levies on cement. .
• The Union Budget for FY2007 has provided further thrust to the infrastructure sector through several initiatives, such as budget support on:

Ø       the National Highways Development Programme (NHDP)

Ø      special accelerated road development programme for the North Eastern region

Ø       development of 1,000 kms of access-controlled Expressways

Ø      ‘Bharat Nirman’ to focus on 6 components of rural infrastructure including irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity

Ø      Increased outlay on `Bharat Nirman’ and on increasing the pace of implementation of irrigation projects. 

Outlook 

• On the consumption side, 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.
• The housing sector, which accounts for around 55-60% of total demand, is likely to continue to be the leading force. The requirement of new dwelling units over a period of 25 years (1996-97 to 2020-21) will be around 140 million units requiring an investment of approximately Rs. 20,000 billion. Demand from infrastructure projects and industrial/commercial ventures account for 20% each.
• Over the next five years, the number of households is expected to increase at a CAGR of 2.3 per cent, against a population growth rate of over 1.7 per cent. There is also going to be a shift in the rural-urban household ratio from 70:30 to 67:33, this boom is expected to propel higher cement demand.
• According to CRISIL estimates, due to the demand-supply gap of nearly 40 million tonnes, capacity addition is expected over the next five years in the sector needing an investment of around US $ 2.2 billion. All the players have resorted to a combination of greenfield capacities as well as takeover of existing capacities for growth. 

• 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 tonnes and 298 million tonnes, respectively, with capacity utilisation of 90 per cent. To attain the targeted capacity addition, an investment of Rs. 52,400 crore would be required during the 11th Plan.
• Overall, both the ICRA and CRISIL estimates project the cement demand in the medium term is expected to grow by around 9%.
• The CRISIL reports project that cement demand is expected to outstrip supply over the next year and a half as no major capacities are coming on-stream.

References : ICRA & CRISIL reports, Annual Report Ministry of Commerce & Industry