Views on the Cement Sector in India - October 2009

1. What are the important factors that influence the cost of production in cement manufacturing?
Raw material costs are key to cement manufacturing. Many of the Indian cement companies own their captive limestone mines, where with new technologies, cost of mining can be within control. Apart from raw material costs energy cost contributes significantly to the cost of final product. Energy costs contribute about 26 - 61 percent towards total cost of cement production, depending upon the technology. Coal import prices have seen peaks in the past and likely to rise again in future, which are again likely to impact cost of manufacturing. Transportation costs also are significant contributors in costs, particularly for those plants which are located in the vicinity of raw material sources and have to transport cement to markets. Taxes and levies form another significant part of cost of cement. In India cement producers pay duties on power, tariff, sales tax, royalty and cess on limestone, coal, gypsum and also excise duty. In India taxes and levies for cement account for nearly 20% of the selling prices.

2. Logistics - how important is it? How much of making money in cement depends on logistics?

In India, increasingly cement producers may desire to locate their manufacturing units near the markets. Long distance transportation of cement is generally not common in India. Cement being a high bulk and low value commodity requires huge volumes in railway rakes and trucks and this may result in product being uncompetitive in distant markets. The higher cost of diesel may also be seen as having adverse impact on the demand for cement and hence, determine the preferred site and transportation strategy.

3. Today, Indian cement companies are trying to reach out to different markets and are thus setting up plants across the country. It sounds like a sound logic when done domestically. But how does it pan out when once does it internationally to hedge?

The foreign ventures may be from the geographical diversification perspective. It may be appreciated that other developing countries too have been observed to have higher focus on housing and infrastructure development. Also, availability of raw materials could be an important factor for development of cement manufacturing capacity abroad. Hence, developing countries with abundant limestone and coal reserves may be targets for expansion.
The strategy for foreign expansion may be in view of the market conditions in India. There are some views in the industry that consider the likelihood of Indian markets heading towards capacity surplus in view of announcements of capacity additions by most manufacturers. However, if Indian GDP is to grow at close to 7-8% per annum in the medium to long term, such surplus may not arise.

4. What are the risks of international marketing or having facilities across various international locations?

Political & legal risks are key in foreign ventures. These range from uncertainty of regulatory framework to concerns about nationalization, which have been observed in some developing countries. Concerns may also include business risks of quantum of demand and pricing, investment restrictions, taxation concerns and risks of restriction on financial resource transfers. There are also concerns of social engagements with people of different cultures, and managing such soft keys may be challenging at times.

(These are from my short interview conducted by Forbes India, part of which was used in their article in issue dated 20th November 2009.)