CEMENT SECTOR ANALYSIS
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INTRODUCTION
• India is the world’s second-largest cement producer, with
a 7% global market share.
• Surprisingly, the largest producer, China, accounts for
over half of the total global cement production. China
produced 2.1 billion tonnes in 2022, while India
produced ~370 million tonnes.
• India has an installed capacity of over 570 million tonnes
per annum (mtpa). Another ~150 mtpa in capacity is
expected to be added by 2027.
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INTRODUCTION
• Owing to the housing and infrastructure boom in Eastern
India, the region is expected to get a third of the total
capacity additions.
• It also accounts for 80% of houses constructed under the
PMAY-G scheme.
• Pradhan Mantri Awas Yojana (Gramin), or PMAY-G, is the
central government’s scheme to subsidize the
construction of pucca houses with basic amenities in
villages.
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INTRODUCTION
• Generally speaking, there are two types of cement – Portland
Cement and Non-Portland Cement.
• All cement we generally see being used around is Portland
Cement and its various blended forms.
• Non-Portland cement is not commonly used due to its
corrosive nature.
• Although a value-added product in itself, cement is
essentially a commodity. Its all-pervasive use has made the
cement an industry of its own, and its peculiarities warrant
an analysis unique to the sector.
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HOW IS CEMENT MANUFACTURED
Let us have a glimpse of the Portland cement
manufacturing process to identify the various sources or
steps that could impact the cost of production, its selling
price, and profitability.
• The first step is mining limestone from quarries, the key
ingredient in cement production. Most cement makers own
limestone quarries.
• Limestone and clay are mixed in an 80:20 ratio and ground
into fine powder. Limestone content could be lesser,
depending on the desired cement properties.
• Video: https://www.youtube.com/watch?v=asLWBGtAhZk
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HOW IS CEMENT MANUFACTURED
• This fine powder is mixed with water in a 65:35 ratio to form a slurry
• The resultant slurry is fed into a kiln to be heated at 1400-1500
degree Celsius to make clinker
• Clinker comes out of the kiln in the form of grey balls.
• The clinker is then cooled. About 3-4% content gypsum is added to
it. It is blended with fly ash, GGBS, or other such materials
depending on the type of cement required. (Fly ash is a waste
residue from thermal power plants, and GGBS or Ground Granulated
Blast Furnace Slag is waste residue from iron production.) Most
cement sold in India is in blended variants.
• The mixture is ground into fine powder. This powder is cement.
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HOW IS CEMENT MANUFACTURED
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THE THREE MAJOR COST CENTRES
1. Input Cost
• This is basically the Cost of Goods Sold.
• Limestone is the most important ingredient in cement.
Cement companies own limestone quarries to control
costs. They mine limestone from their quarries and
process it to make clinker at plants that are generally set
up close to the quarries.
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THE THREE MAJOR COST CENTRES
1. Input Cost
• Water is another major input in the process. Consistent
water supply is also a major challenge in many parts of
our country.
• Therefore, many cement companies have water
recycling, rainwater harvesting, and groundwater
recharging systems in place. This ensures regular water
availability and better visibility of costs.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
• Most cement manufacturers maintain captive power
plants to bring down fuel costs. If a manufacturing
company can produce power for its own use, it is said to
have a captive power plant.
• Another example would be a pizza chain owning a small
tomato farm to produce fresh organic tomatoes for its
pizzas. In this case, the tomato farm is called a captive
farm. A captive unit’s product is not sold but used in-
house for producing another product.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
• Larger players like Ultratech Cement, Ambuja Cement,
and ACC have captive thermal, wind, and solar power
plants. Despite captive power plants, fuel costs for these
major players can be as high as 25% of the revenues.
• Some cement makers even own coal mines to insulate
from the impact of coal price fluctuations. Ultratech and
Ambuja both have captive coal mines to support their
requirements partially.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
• Sourcing coal can often be a challenge. For instance,
whenever there is a coal shortage, the government could
ask domestic coal producers to sell coal only to power
generation companies.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
• This is not to say that coal mine owners are always better off.
• During a down cycle when the demand for cement is low,
owned coal mines are a fixed cost that the manufacturer
must bear amid slow production and sales.
• Or if there came a time when coal prices were abysmally low,
buying coal from the market would become cheaper than
mining at owned quarries.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
Controlling Waste and Climate Change
• All cement producers have waste heat recovery system
(WHRS) plants in place.
• WHRS is good for two reasons – fuel cost savings and
reducing carbon footprint.
• The tremendous heat generated in clinker production is
channelled to generate steam.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
Controlling Waste and Climate Change
• This steam is passed through turbines to generate electricity. This
electricity can cater to 25-30% of the cement plant’s power
requirements.
• The increasing focus on reducing fuel costs and carbon footprint
has given rise to an interesting metric known as the Clinker factor.
It represents the proportion of clinker in a cement recipe.
• The lower the clinker factor, the better.
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THE THREE MAJOR COST CENTRES
2. Power and Fuel Cost
Controlling Waste and Climate Change
• It is because clinker is also the most fuel-consuming step in
the process of cement production.
• Manufacturers have been innovating recipes that augment
the features of cement while retaining its strength.
• Fly ash, gypsum, silica fume, volcano ash, and other industrial
by-products are common ingredients of blended cement.
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THE THREE MAJOR COST CENTRES
3. Freight Cost
• Cement is a perishable product. It typically has a shelf-
life of just 90 days.
• Therefore, the distribution of cement has to be fast and
efficient.
• It is also perhaps why cement producers own the entire
value chain beginning with limestone quarries. It enables
them to be in control of the inventory and costs.
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THE THREE MAJOR COST CENTRES
3. Freight Cost
• Since perishability is a concern, cement companies might
also own warehouses and trucks to monitor costs, time,
and wastage.
• Another industry hack is to have grinding facilities closer
to the market. According to Ultratech Cement’s Annual
Report for 2021-22, it has 23 integrated plants, 27
grinding plants, and over 175 Ready-mix Concrete Plants.
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THE THREE MAJOR COST CENTRES
3. Freight Cost
• To solve the perishability problem, grinding units are set up closer
to the market.
• The grinding unit will cater to a market which is more likely a state
or comparable region.
• These facilities receive clinkers from the clinker plants that are set
up near the quarries.
• Other components to be blended into the cement are procured
directly at this grinding facility. The clinker with other components
is ground to make the final cement. The grinding unit’s proximity
to the market means a shorter time spent transporting the cement
to the market.
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DISTRIBUTION OF CEMENT
• Distribution of cement, or bringing it to the market,
requires its own study. Cement is a “low value, high
volume” product.
• As of this writing in May 2023, a 50 kg bag of
cement costs roughly ₹400.
• Compare that with a bag of grains or cloth or cosmetics
or gold. Transporting a unit of any of these items from
one point to another will surely bring higher revenues
than transporting the same unit of cement.
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DISTRIBUTION OF CEMENT
• Perishability, as discussed earlier, is a challenge too. An
efficient distribution system is key to maintaining
profitability in the cement business.
• At a time when urbanization has picked up pace, cement
has become a necessity.
• If the market had only a small number of manufacturers,
they could dictate prices, effectively impacting
infrastructure growth and real estate prices.
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DISTRIBUTION OF CEMENT
• But the industry has several large players; over 25 are
listed.
• However, the top five players account for almost half the
national capacity.
• Huge capacity additions have been driving competition.
Competition is also pushing the players to innovate and
develop more ways of cutting costs and improving
margins.
• Some are spending on branding and marketing to boost
sales.
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DEMAND DRIVERS FOR CEMENT
The next step is to understand the uses or users of cement.
Cement is used in building houses, roads, dams, and other
infrastructure. The cement users could be classified into three
broad categories – housing, infrastructure, and industrial.
• Keeping aside unconventional building techniques, every
residential building uses cement. Therefore, growth in the
real estate sector is usually perceived as a positive sign for
the cement sector. When tracking the growth of the cement
sector, be careful not to mistake growth in house registrations
as growth in the real estate sector. Resale is a big part of
registrations.
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DEMAND DRIVERS FOR CEMENT
• Infrastructure encompasses roads, bridges, railways,
airports, dams, and irrigation facilities, among other
public facilities, mostly built by the government. The
more the government spends on infrastructure, the
higher the demand for cement from this sector.
• The industrial application of cement is in building
factories, processing plants, kilns, and other industrial
structures. Large corporations generally do these kinds of
capital expenditures.One must, therefore, check if the
demand is growing and if corporations are willing to
cater to that demand.
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DEMAND DRIVERS FOR CEMENT
Seasonality also impacts the demand for cement. All forms
of construction activities usually slow down during the
monsoon season, thereby impacting the demand for
cement.
Studying manufactured bulk commodities like cement
requires a deeper focus on the entire value chain, from
production to distribution and sales.
The asset-heavy nature of the value chain also makes
cement manufacturers prone to take on more debt. An
investor studying the sector must also look at the debt
levels of the companies and the sector at large.
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THE CHECKLIST
You can find these metrics in cement companies’ quarterly
presentations and annual reports.
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THE CHECKLIST
Regional Presence:
• Diversification helps reduce risk. A company with its
operations and market spread out across the country is
more likely to continue operating despite any challenges.
• If one plant cannot operate for any reason, the others
can fill in.
Market Share: A larger market share usually results from a
strong distribution network.
• Customers might want to buy a specific cement brand
but will usually buy one easily available near their
location.
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THE CHECKLIST
Production Capacity:
• The larger the production capacity, the larger orders the
cement maker can serve.
• Cement makers want to add capacity if the economy is
seeing a boom in infrastructure and real estate sectors.
• However, the cost of adding capacity must also be
justified with the expected projected income from that
capacity.
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THE CHECKLIST
Capacity Utilization:
• Let’s say a cement maker has an annual capacity of
producing 100 mtpa worth of cement, but they produce
only 70 mtpa.
• Effectively, they operate at a 70% capacity, or capacity
utilization was 70%.
• As an investor, you must determine why the full capacity
was not utilized.
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THE CHECKLIST
Capacity Utilization:
• External factors such as natural calamities, pollution
controls, and regulations could limit full utilization.
• For example, if heavy rains were to shut down
production for three months, operating at 100% capacity
for the remaining nine months would also mean only
75% utilization.
• Internal factors such as the unavailability of raw
materials or labour could also hamper production.
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THE CHECKLIST
Sales Volume:
• Not all that is produced is sold. In fact, some cement
makers sell more than what they produce.
• They may buy volumes from other cement makers to
fulfil their commitments to customers.
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THE CHECKLIST
Realization/MT:
• Realization is the average selling price per unit. Higher
prices lead to higher revenues.
• This snapshot from Ultratech Cement’s Q4 presentation
for FY23 shows that grey cement realizations have
slightly moderated compared to the previous quarter.
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THE CHECKLIST
Realization/MT:
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THE CHECKLIST
Input / Power and Fuel / Freight Cost Ratios:
• The smaller these ratios, the better. Looking for each of
these ratios separately can help identify what part of the
business is driving costs and which one is improving
margins. Cement companies typically try to control all
these costs by having these activities in-house – captive
quarries, power plants, and fleets.
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THANK YOU
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