Cement faces production headwinds from China
Manufacturers are relying on govt’s infra spending to boost demand, but China may dash their hopes if it starts to export its surplus
Whether it is steel or cement, China in terms of capacity as well as production is miles ahead of India. In steel, where it wants to become the world’s second largest producer by 2018, overtaking Japan in the process, India has capacity of around 125 million tonnes (mt) compared with China’s over 1.1 billion tonnes (bt). In cement, too, the Chinese capacity at 3.5 bt is nearly ten times bigger than India’s.
As it would happen, the cement industry in each of the two countries is straddled with surplus capacity. Moreover, all the cement that is produced in either country will not pass the increasingly stringent global quality benchmark.
In fact, China admits that a significant portion of its cement production is of ‘Mark 32.5’ category that is good only for plastering. Higher grades such as 42.5 and 52.5 are, however, mandatory in a growing number of countries for applications in columns, beams, slabs and construction of bridges. The good thing is that the China Cement Association (CCA) is becoming increasingly wary of low quality production on a large scale.
An industry official says: “You have more than 3,500 cement producers in our northern neighbour where capacity is now over 30 per cent in excess of demand.”
What has worked to the advantage of the industry is that aggregation of capacity began early. It was caused by groups from within, led by Ultratech Cement of the Aditya Birla group, and outside, spearheaded principally by Holcim of Switzerland which has merged with Lafarge of France. Consolidation drive In the past, some cash-rich groups such as Tata Steel, Larsen & Toubro and Raymond chose cement for diversification. Once they realised cement was never to become part of their core business, they sold the assets, aiding consolidation in the process. Some mid-sized groups realised it early that if they were to stay independent and avoid prying eyes of capacity consolidators, then they must grow in size.
At the same time, the process of consolidation here got a boost last year when, in order to reduce its debt burden, the Jaypee group sold its 17.2 mt cement business to UltraTech and Anil Ambaniowned Reliance Infrastructure disposed of 5 mt capacity to Birla Corporation. Odisha-based Shiva Cement found a taker in JSW Cement. Industry doyenne Basant Kumar Birla, who saw ahead of most others growth opportunities in cement following removal of all controls, built substantial capacity under Century, Kesoram and Mangalam. Ambuja Cement, now a shining jewel in the global crown of HolcimLafarge, is also a result of reform-related opportunities seized by first generation industrialist trio Narottam Sekhsaria and the late Suresh and Vinod Neotia.
Well ahead of Holcim stepping into Ambuja in end January 2006, the Sekhsaria-Neotia combine did its bit in capacity consolidation by buying out Modi Cement and then turning it around.
But consolidation is far from complete as the industry still remains dotted with groups with capacity ranging from 1 to 5 mt. Valuation has now, however, become stiff, making potential acquirers circumspect in making deals. The upstart to watch in the industry here will be JSW Cement which is working to lift capacity from 7 mt to 17 mt by April 2018. Rising capacity At the time of decontrol, Birla made two important points. One, the energy released by decontrol would bring major investments in the sector to lift capacity manifold from 43.5 mt in 1989. This has happened with capacity now around 370 mt.
Some global cement leaders are already here using the acquisition route. Many others are eyeing presence in India where the industry should see long-term healthy demand growth, periodic blips notwithstanding.
Two, inefficient, power-guzzling and polluting units would not survive in a competitive market. Unlike in India where dismantling of controls has created the ideal condition for industry growth and restructuring, nothing worthwhile happens in China without the central government’s intervention. Had not president Xi Jinping himself given the order, China would not have made last year’s surprising progress in shutting uneconomic and polluting steel and coal capacity. In fact, he wants cement capacity to be cut similarly.
To put the Chinese industry into shape, its capacity needs to be cut by at least 390 mt. which will cause job contraction of around 130,000 over the next five years. Unquestionably, under growing pressure from the government, CCA is advocating consolidation to the extent of ten leading cement groups coming to own at least 60 per cent of industry capacity through mergers and acquisitions. To make a success of consolidation, the 3,400-odd cement producers will be required to build a restructuring fund of $2.9 billion.
India has reasons to view with concern the propensity of Chinese industry to export surplus cement. Ambuja Cements, which owns capacity of 63 mt, including that of its subsidiary ACC, says zero customs duty on cement remains an area of concern for local producers since this is an “incentive to import.” What is not to be lost sight of is that India is nursing idle capacity of over 90 mt and imports can only aggravate the “demand and supply mismatch.”
The history of Indian cement industry since its full decontrol is marked by periodic occurrences of surplus capacity with expansions by different groups in bunches. Demand growth in subsequent years would mostly absorb the new capacity. The industry is laying great hope on the government’s ambitious infrastructure development programme, promotion of 100 smart cities and housing for all by 2022. Ideally, in an emerging economy where infrastructure development claims high priority, cement demand should be growing at a rate higher than the GDP.
But Indian cement demand grew only 5 per cent last year, leaving a good percentage of industry capacity idle. Ambuja Cements says heavy rains during the last southwest monsoon and demonetisation of the two highest value currency notes on November 8 “pulling back construction cycle” took a toll on cement demand in the second half of 2016. Now expect rural cement demand to spurt on the back of a record 2016-17 foodgrain production of 272 mt and near completion of remonetisation.