Monday, 6 May 2013

Strategic Business Alliances-Cement Industry in India-Project Report

Project Report on Strategic Business Alliances in Cement Industry in India

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 Global Players

Rapid urbanization and the booming infrastructure have lead to an increase in construction and development across India, attracting even the global players. The recent years have witnessed a surge of foreign direct investment in the cement sector. International players like France's Lafarge, Holcim from Switzerland, Italy's Italcementi and Germany’s Heidelberg Cements together hold more than a quarter of the total capacity.

• Holcim, one of the world's leading suppliers of cement, has 24 plants in the country and enjoys a market share of about 23–25 per cent. It will further invest about US$ 2.49 billion in the next five years to set up plants and raise capacity by 25 MT in the country. Holcim has a global sale worth about US$ 20 billion, where India contributes US$ 2 billion–2.5 billion.

• Italcementi Group, which acquired full stake in the K K Birla promoted Zuari Industries' cement, for US$ 126.62 million in 2006 plans to invest US$ 174 million over the next two years in various Greenfield and acquisition projects.

• The French cement major, Lafarge which acquired the cement plants of Raymond and Tisco with an installed capacity of 6 MTPA a few years back plans to double its capacity to 12 MT over the next five years by adopting the greenfield expansion route.

• German major Heidelberg Cement has merged Mysore Cement, in which it owns around 54 per cent stake, Indorama, (where it acquired 100 per cent stake in 2008) and its 100 per cent Indian subsidiary, Heidelberg Cement India.

Government Initiatives

Government initiatives in the infrastructure sector, coupled with the housing sector boom and urban development, continue being the main drivers of growth for the Indian cement industry.

• Increased infrastructure spending has been a key focus area over the last five years indicating good times ahead for cement manufacturers.

• The government has increased budgetary allocation for roads under National Highways Development Project (NHDP). This coupled with government's initiatives on the infrastructure and housing sector fronts would continue to remain the key drivers.

• Appointing a coal regulator is looked upon as a positive move as it will facilitate timely and proper allocation of coal (a key raw material) blocks to the core sectors, cement being one of them.

• Other budget measures such as cut in import duty from 12.5 per cent to nil, removal of 16 per cent countervailing duty, 4 per cent additional customs duty on portland cement and differential excise duty are all intended to cut costs and boost availability.

Ban on Cement exports were lifted

With a significant increase in both the production and off-take of cement in India, the government has lifted the export ban on the commodity. Since cement prices have stabilized, it was no longer felt necessary to continue with the export ban.

Excise duty cut, revival package give ray of hope for cement companies

Starting on a bullish note with prices touching historic high amid buoyant demand, cement industry slipped on to a sticky wicket as the realty sector was rattled by the unprecedented financial crunch. The recent reduction in excise duty from 12 per cent to 8 per cent and the Government’s effort to revive the ailing realty sector brought in new hopes for the battered cement stocks over the first half of December month, though many of them closed flat due to profit-booking. Almost all the major cement companies have dropped prices between Rs 4 and Rs 8 for every 50 kg bag after the Government announced a four per cent cut in excise duty.

The Government is also considering a special package for the housing sector.

Globally, commodity prices such as crude oil, base metals and coal have been under pressure with the onset of slowdown in economic activity. The fall in commodity prices continued in November and international coal prices dropped 60 per cent to $78 a tonne in December first week from July peak of $193 a tonne. Coal prices are down 14 per cent year-on-year. Moreover, shipping freight rates have plummeted, leading to a significant drop in landed cost of coal.  However, the drop in freight rates was partly negated by 15-17 per cent depreciation in value of rupee against dollar. The sharp fall in international coal prices would lead to softening of  domestic prices.

The cut in excise duty and drop in coal prices will bring down cost of production to Rs 12.50 for a 50 kg bag. With prices softening by Rs 4 a bag, we estimate that profitability of cement companies to have improved by at least Rs 8 to Rs 10 a bag. Prices have already come down by as much as Rs 10 a bag in the northern and eastern region due to demand slowdown and imports from Pakistan. Consequently, a significant 20 per cent improvement in profitability of cement companies in Q4-FY-2009.

Cement transportation cost domestically may also come down with the cut in diesel prices. The reduction of 5 to 6 per cent in diesel prices will result in 1.5 to 2 per cent drop in freight rates for cement companies, depending on the road and rail transport mix. Companies will also benefit on transportation of fly ash an important raw material besides clinker to the grinding units.

Countervailing Duty and Special Additional Duty
Government restored the Countervailing Duty (CVD) and Special Additional Duty (SAD) on imported cement, which was removed 19 months ago to contain inflation. The domestic  players have been demanding the re-imposition of CVD on imported cement in order to have a level playing field. The CVD currently is Rs. 408 per tonne while, SAD is 4%. The restoration of the import duties will ease pressure in cement prices, mainly in the northern region, caused by cheaper imports from Pakistan.

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