By Kunal Bose
Like in so many other industries, China dwarfs all other cement producing countries in capacity and production. And that is not going to change any time in future either. The other Asian nation India endowed with rich limestone deposits spread in various parts of the country may be trailing China by a long margin in capacity, number of manufacturers and output, but it remains the most attractive destination for cement makers.
This is because unlike in its neighbour in the north, the leading Indian cement groups from UltraTech Cement (the largest in the industry with capacity of 146.2m tonne and growing all the time) to Adani, the majority shareholder of Ambuja and ACC (combined capacity to rise to 140m tonnes by 2028 from the present 79m tonnes) and Dalmia Bharat (capacity close to 45m tonnes across 15 cement plants and grinding units) are all operating at high capacity, earning good profits and remaining engaged in capacity growth through organic and inorganic routes. Indian Bureau of Mines says the country has limestone deposits of 2,03,224m tonnes, including reserves of 16,336m tonnes (8%) and resources of 1,86,889m tonnes (92%). Thereby, the industry is assured of easy supply of basic raw material for decades.
Compare this with the cement scene in China where humongous capacity of approximately 3.8bn tonnes has proved to be a burden both economically and environmentally. As the world has seen in the case of steel in particular, in cement too China has the burden of inefficient, environment damaging and less than optimum capacity resting with a large number of units. The phenomenon is particularly visible in Shandong province, which Beijing has targeted for radical reorganisation of the industry and shutting down of units.
The country’s commitment to progressively phase out surplus cement capacity is underlined by reference to the subject in the 14th five-year plan (2021-25) along with setting the ambitious target to reduce CO2 intensity by 18% by 2025 and also create condition for peak carbon emission by 2030. As a major follow-up to the introduction of regulations in 2018 limiting creation of new cement capacity, Beijing further tightened restrictions in December 2020 requiring of producers to retire 1.5 tonne of outdated capacity for every tonne of new capacity creation in non-environmentally sensitive areas instead of scrapping 1.25 tonne stipulated earlier.
The net effect will be continuous capacity reduction, improved demand-supply balance and hopefully better earnings for cement makers. But why is the China focus on cleaning up Shandong province? According to International Cement Review (ICR), a leading industry research group, Shandong being a leading cement production centre with much too much capacity, the province proved the natural target for capacity deactivating. Faithful implementation of the plan – there are quite a few instances of provincial bosses going their own way and not honouring the central directive – will see scaling back of national capacity. After Shandong sees the dismantling of clinkers with capacity of less than 2,500 tonnes per day (TPD), the ones with somewhat higher capacity will either be forced to stop production or be merged. ICR has come to know capacity elimination operation “will result in the shutdown of around 35 clinker production lines and 182 grinding units” in the eastern coastal province.
The intriguing thing about India is even while the cement demand is growing at a healthy rate and new capacity is built all the time, why did the world’s largest cement maker Holcim quit the country in September 2022 after having a resounding success with the two acquired entities Ambuja Cement and ACC over 17 years? But India was one of the many markets that the Swiss multinational quit, including Brazil, Northern Ireland, Russia, Zimbabwe, Indonesia, Malaysia, Vietnam and the Philippines to focus on speciality building solutions, high-end energy efficient renovations and core markets. The exits and simultaneous acquisitions of companies engaged in eco-friendly solutions and products happened for Holcim in recent times. Cash proceeds from divestiture – India exit got Holcim $6.4bn – while strengthening Holcim balance sheet helped it at the same time to fund new acquisitions. All that Holcim is doing of late is part of the group “strategy 2025; accelerating green growth.” The Holcim announced goal is to become the “global leader in innovative and sustainable building solutions.”
With the exit of Holcim, India is left with only one foreign cement entity – Heidelberg Cement India, which is a subsidiary of Germany’s Heidelberg Cement. Like Holcim, Heidelberg Cement started operation in India in 2006 by way of acquisition of businesses of Mysore Cement and Cochin Cement and also forming a joint venture with Indorama Cement. Ten years later, the German subsidiary acquired the cement business of Italcementi further broadening its India portfolio. What began on a modest scale of 2.3m tonnes has now a respectable capacity of 14m tonnes resting on four integrated mills and a similar number of grinding units.
Armed with fairly strong brands, Heidelberg Cement sells its cement in 12 of 28 Indian states. Holcim withdrawal came as a disappointment for New Delhi, which wants foreign direct investment in an industry of strategic interest for infrastructure and housing development. Moreover, the presence of global leaders such as Holcim and Heidelberg Cement ensures technology transfers, leading to carbon neutrality goal. Take Heidelberg Cement AG, which is continuously investing in technologies relating to carbon capture and storage (CCS), low carbon concrete products and hydrogen as fuel. In India, the company subsidiary is staying in the industry forefront to use growing volumes of renewable green energy to progressively bring down emission levels in cement making. The subsidiary’s 5 megawatt solar power plant at the limestone mining centre at Damoh in Madhya Pradesh will lead to CO2 savings of 225,000 tonnes over the standard life of the unit.
DCI inquiries with industry officials and sector analysts point to further capacity consolidation happening in India with over half a dozen leading groups remaining in the hunt for integrated mills and clinker and grinding units in the south (still the country’s most fragmented capacity centre), the east, north and central regions. Take UltraTech Cement whose capacity is double that of the second largest Adani group and the company has achieved the pinnacle height in capacity terms, largely by way of acquisitions that started with the takeover of the country’s leading engineering and construction group Larsen & Toubro’s cement business in June 2013.
Since then, UltraTech bought JP group’s cement plants, Binani Cement, cement business of Century Textiles and Kesoram Cement. “Acquisitions bring challenges of integrating, culturally and operationally of new units with the mother organisation. An then there are also issues of exploring possibilities of capacity expansion, inducting new advanced technologies, lower energy consumption and reduce carbon emissions,” says an official of Cement Manufacturers Association (CMA).
The prime objective of capacity consolidation is to gain pricing power, secure synergies leading to improvement in operational efficiency and therefore, cost reduction and moving greater volumes to the market under established brands. Companies leading the acquisition charge are able automatically to raise their market share. A good way to judge how acquisitions are proving to be value accretive for participating companies and their shareholders is to see if working results have improved and share prices are up following addition of new capacity through takeovers.
Indian cement company shares have become pricey with PE ratio of 42.18 for UltraTech and 37.14 for Ambuja and 37.37 for Shree Cement. Crisil Market Intelligence & Analytics says in a recent report that high energy (power and fuel) in the last two financial years (April to March) made operations unviable for the relatively small outfits making them targets for acquisitions for large groups. But since then there has been a 13% to 15% reduction in power and fuel costs bringing some relief to cement makers unable to arrest fall in product prices because of subdued demand and company focus on gaining market share. IIFL research says: “Cement prices have been on a declining trend since November 2023 and in 2023-24 fourth quarter average price was down 5.5%, quarter on quarter basis. Prices fell across regions with steepest decline seen in the west followed by the east and the south. The least affected was central and north India.” (IPA Service)
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