Cement companies face hard truths
Manufacturers in India and China were anticipating growth on the back of an infrastructure splurge. The pandemic has forced them to cut back, and revival this year looks tough
As with steel so also with cement, Asia hosts the world’s two largest producers in China and India. But in both industries China soars past its neighbour in the south by enormous margins in terms of capacity, production, and domestic market size. In steel, China’s 2019 capacity, as estimated by S&P Global Platts, is 1.21 billion tonnes (bt) against India’s around 150 million tonnes (mt). No surprise in cement either, where Indian’s capacity is around 545 mt compared with China’s approximately 3.5 bt. In normal times, both countries would have needed more and more cement for infrastructure building and construction activities. But this year because of Covid-19 pandemic, the cement industry in both the countries has taken a major hit in production and demand.
Cement makers in China came under the weather ahead of producers in other countries since Covid-19 appeared there officially at the end of December. Irrespective of the fact that the lockdown started in India on March 25, cement companies must not have fared well in the final quarter of 2019-20 since the commodity in the New Year began on a subdued note. As Ambuja Cement Chairman Narotam Sekhsaria said, “low infrastructure spending and muted private sector participation in construction space, including housing” restricted cement demand growth at 2 to 3 per cent in 2019. Who either in the government or business could have foreseen, till at least the third week of February, that Covid-19 would hit the Indian economy so hard? Otherwise why should Narotam Sekhsaria in a statement to Ambuja shareholders say on February 20 that fiscal sops for affordable housing and the very high promised investment in infrastructure would make the 2020 outlook for cement “positive.”
As the lockdown continued through April to spill into May, Centrum Broking estimates an “average volume impact of 90 per cent” in the first month of the current quarter. March was not good either for cement when demand reportedly shrank by 30 per cent. The period from March to June is the high season for construction activity in this country, after which the monsoon starts interfering with the work. KPMG says in a report that Covid-19 will leave a “severe impact” on most projects worth more than ~59 trillion under development. No doubt, failure to complete critical projects under the national infrastructure plan because of Covid-19-related dislocations will stand in the way of the Modi government’s ambition to make India a $5 trillion economy by 2024. Disruptions in construction work on an unprecedented scale are the reason leading cement makers started making the material in sync with anticipated demand instead of going full throttle after the long layoff, with the government allowing them to resume production from April 20.
But as Shree Cement Managing Director H M Bangur pointed out: “The government has allowed us to start production, but we don’t have the market...we can start but we can’t store the production. Volumes have to move out every hour. Till there is demand in the market, restarting doesn’t mean much.” The construction industry employs nearly 50 million people that is close to 12 per cent of the country’s working population. Denied of any income during the lockdown, the daily wagers have dispersed and construction companies have a herculean task in hand to mobilise workers. This will cause collateral damage to cement demand. Since there could only be a gradual recovery in construction and uncertainty remains about how far New Delhi will go to pump up the economy, industry officials are resigned to a “15 to 20 per cent contraction in cement demand” in the financial year to end March 2021. In the decade preceding 201920, cement demand here scored a compound annual growth rate of 9 per cent outpacing GDP growth of 7 per cent.
What about China, which has an undiminished capacity to spring surprises? Few thought that the country’s cement industry, in spite of the restructuring process, would manage to raise production by 6.1 per cent to 2.33 bt in 2019, exactly in line with GDP growth. While cement
production grew at the highest rate in five years, clinker output of 1.52 bt was a record. Come 2020, Chinese cement makers were badly mauled in the first quarter. According to Global Cement, “the national cement industry output fell by 29 per cent year-on-year to 150 mt in January and February 2020. Output then picked up to 149 mt in March, but still a drop of 17 per cent compared to March 2019. These are massive figures larger than the annual output of most countries.” Along with a slide in production, producers had to contend with a fall in demand and profits.
In times like these, small cement players in India with limited regional presence run the risk of viability erosion. In recent times, the industry was witness to acquisition of two medium-sized cement makers, namely, Reliance Cement (part of Anil Ambani group) and Emami Cement by Birla Cement and Nirma group, respectively. Bangur believes that even after all the mergers and acquisitions (M&A), the cement industry here offers further scope for consolidation. According to him, “Ownership of less than 10 mt capacity or presence in less than two geographical areas is a weakness and making such entities candidates for takeovers. You have to have the might of capacity and also the required geographical spread.” The Aditya Birla group’s Ultratech Cement and the two Indian entities of Lafargeholcim, namely, Ambuja Cement and ACC, are examples of what good M&AS can achieve. Shree Cement has plans to double capacity to 80 mt in the next six to seven years.
China, which has capacity spilling over, has a three-pronged strategy to restore order in cement industry. First, Beijing decided in February 2018 that expansion of cement capacity would be strictly off-limits and where new capacity building is absolutely necessary, the industry must follow capacity replacement rules to ensure “total production capacity will only get reduced and not rise in any case.” Cranking down on surplus capacity is part of supply side reforms to be supplemented by speeding up consolidation that should leave ten leading producers with as much as 80 per cent of capacity. That kind of major capacity ownership by less than a dozen groups will give them a more “rational market and profitability.”
Simultaneously, as part of China’s environment cleaning up programme, the industry is asked to shut old mills and migrate from low-end cement that requires higher quantities of clinker to superior grades such as PO42.5 and PC32.5. At the same time, the country as part of its Belt and Road initiative launched in 2013, is building cement plants in a number of partner countries such as Kazakhstan, Vietnam, Pakistan, Bangladesh, and Indonesia. From funding of plants to supplying technology and machinery, the Beijing move represents a shift of excess capacity at home to foreign lands and earning goodwill at the same time.