162-Cement Industry in India

7/28/2019 162-Cement Industry in India

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CEMENT INDUSTRY IN INDIA

Contents:

Executive summary

1. Introduction

1.1. Objective

1.2. Methodology

2. Cement Industry : An Overview

2.1. Market Structure

2.2. Demand and Supply Analysis

2.3. Pricing Strategy

2.4. Complementary Goods

2.5. Implication of Indirect Taxes

2.6. Demand Estimation

3. Findings

4. Conclusion and Recommendations

5. References

6. Appendix

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Cement Industry in India

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Executive Summary

Indian cement industry is the second largest in the world in terms of its production

capacity (1.06 billion )tones and this constitutes 6% of the total installed capacity.

This industry employs over 0.14 million people and constitutes 1.3% of the GDP.

Cement demand has posted a healthy growth rate in tandem with the strong economic

growth rate of the country. This sector is highly fragmented with the top six players


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accounting for about 60% of the total installed capacity. The major demand was

witnessed from growth in IT sector, Shopping malls and integrated township

segments and other infrastructural development projects. With buoyancy in the

housing construction, continued emphasis on infrastructure along with the new

industrial projects expected to materialize, the industry is braced with better times

ahead.

The demand of cement in the country can be termed as inelastic in nature, this can be

authenticated by the fact that irrespective of continued price hike by the industry the

demand for cement has continuously increased over the years. In order to maximize

their profits the major players sometimes resort to restrictive practices by colluding

among themselves and forming cartels.

In determining the price of cement collusive oligopoly plays a major part. The

concept of the pricing strategy and game theory was applied to analyze the price

determinant of cement.

Construction chemicals like admixtures, flooring compounds, water proofing

compounds which are used along with cement are categorized as complimentary

goods to the cement industry. These days the increased demand for cement also

influences the growth of these complimentary goods.

The impact of indirect tax is very pronounced in case of their effect on the price of

cement. Owing to its inelastic demand cement manufacturers invariably pass on the

tax burden to the end consumer.

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1. Introduction

The growth of the Indian economy is no more limited to the IT and the ITES sectors , the


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manufacturing sector is growing over 11 % while the growth of Indias GDP is close to

9%. A study on the sector that is increasingly driving the country towards being a super

power was imperative. With the thrust on infrastructure projects, boom in housing and

real state business, cement industry is growing at a tremendous pace . Growth of the

cement industry is over 10% which is more than the countrys growth rate. The entry of

worlds top five players in the Indian market and the ongoing mergers and acquisitions

has made the Indian Cement Business very dynamic in nature.

The project deals with the analysis of various factors affecting the cement industry .It

focuses on the way firms behave in the highly fragmented market .By applying basic

economic theory, the demand supply position has been analyzed . What are the drivers of

demand and how they affect the demand supply equilibrium is discussed. The pricing

strategy pertaining to the cement market structure and demand estimation is also dealt

with.

1.1. Objectives

1. To study the market structure of the cement industry in India.

2. To study the demand-supply analysis.

3. To analyze the pricing strategy adopted by the players.

4. To study the influence of indirect taxes on the sector.

5. To estimate the future demand of cement in the country.

6. To understand the future prospect of the industry.

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1.2. Methodology


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1. Analysis of the Market Structure on the basis of secondary data.

2. Analysis of drivers of demand and the demand and supply situation prevailing in

the country on the basis of secondary data.

3. Analysing pricing strategy of the product on the basis of game theory.

4. Cross price elasticity of demand for the study of complementary goods.

5. Study of implication of indirect taxes and price rationing on the basis of demand

supply model.

6. Demand estimation using regression analysis.

2. Cement Industry - An Overview

Major players and their endeavors

With an installed capacity of around 157 million tons per annum (mtpa) at end-March

2006, large cement plants accounted for 93% of the total installed capacity in India. The

installed capacity is distributed over approximately 129 large cement plants owned by

around 54 companies.

The structure of the industry is fragmented, although, the concentration at the top is

increasing. The fragmented structure is a result of the low entry barriers in the post

decontrol period and the ready availability of technology. However, cement plants are

capital intensive and require a capital investment of over Rs. 3,500 per ton of cement,

which translates into an investment of Rs. 3,500 million for a 1 mtpa plant.

The Indian cement industry is on a roll. Driven by booming housing sector, global

demand and increased activity infrastructure development such as state and national

highways, the cement industry outpaced itself, ramping production capacity, attracting

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the top cement companies in the world, and sparking off a spate of mergers and


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acquisitions to spur growth.

The result of this hectic activity is:

1. Net profit of the top ten cement companies more than doubled during the quarter

ended June 30, 2006.

2. Cement production has logged on an impressive growth of 13.3 percent in 2005-

06 as compared to only 3.6 percent in the previous year.

3. Cement and clinker exports are poised to touch the 10 million tonnes (mt) marked

by the end of 2006-07, further boosted by a 12 percent rise in the consumption in

Gulf countries and massive redevelopment efforts in Iraq and Afghanistan.

In 2005, India produced 142 million tones of cement, accounting for about 6.4% of the

global production of 2.22 billion tones. This position has been achieved because of

Indias sustained growth at an average rate of 8.1 percent over the past two decades.

Housing and Infrastructure Boom

The recent boom in housing and construction industry in India has worked wonders for

cement manufacturing companies as they registered an average growth of 95 percent in

their net profits for the quarter ended March 31, 2006.

Major cement companies witnessed a 32 percent surge in their sales volume and, across

the board, companies registered high production, higher sales and lower production costs.

1. Ultra Tech Cement reported a whopping 1550 percent rise in net profits at US

$17.69 million in the last quarter 2005-2006.

2. Gujrat Ambuja grew by 109 percent to US$ 64.81 million.

3. ACC net profit rose 27 percent to US $ 50.17 million.

4. Sanghi cement recorded a 455 percent growth in the net profit.

5. Mangalam cement saw its bottom line swell by 173 percent.

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Mergers and Acquisitions


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The booming demand for cement, both in India and abroad, has attracted global majors to

India. Within a short spam 2005-06, four of the top five cement companies entered India

through mergers, acquisitions, joint ventures or greenfeild projects.

These include Frances Lafarge, Holcim from Switzerland, Italys Italcementi and

Germanys Heidelberg cements.

The Indian cement industry has also witnessed a flurry of mergers and acquisitions within

the domestic players, bringing smaller players under the umbrella of the larger

companies, and larger companies coming under the umbrella of the global players like

Holcim and Heidelberg Cements.

Some examples of the consolidation witnessed among domestic players in the recent past

include:

1. Gujrat Ambuja taking a stake of 14 percent in ACC.

2. Gujrat Ambuja taking over DLF cements and Modi cements.

3. ACC taking over IDCOL.

4. India Cement taking over Rassi cements and Sri Vishnu Cement.

5. Grasims acquisition of the cement business of L&T.

6. Grasim taking over Indian Rayons Cement division.

Grasim taking over Sri Digvijay cements.

7. L&T taking over Narmada cements.

Multinational cement companies have been aggressively picking up stakes in large

Indian cement companies.

1. Holcim: Swiss cement major Holcim has picked up 14.8 percent of the

promoters stake in Gujrat Ambuja Cements (GACL). In January 2006,

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Holderind Investment (Holcim Mauritius), an indirect, wholly owned

subsidiary of Holcim, had acquired 200 million equity shares of GACL at a


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price of US$ 2.28 per share from the promoters. Holcim had entered a

strategic alliance with GACL, and acquired a 67 percent controlling stake in

Ambuja Cement India. Through this holding company Holcim acquired a

majority in Ambuja Cement Eastern and a substantial stake in ACC. Ambuja

Cement India holds 35 percent shares in ACC and a 97 percent stake in

Ambuja Cement Eastern. Holcims acquisition has led to the emergence of

two major groups in the Indian cement industry, the Holcim-ACC-Gujarat

Ambuja Cements combine (capacity of 33.5 mt) and the Aditya Birla group

through Grasim industry and Ultratech cement combined capacity of 31.1 mt.

2. Lafarage: The French cement major has acquired the cement plants of Raymond

and Tisco in the recent past and has an installed capacity of 5 mtpa.

3. Italcementi: Italy based Italcementi has acquired a stake in the K.K. Birla

promoted Zuari Industry cement in Andhra Pradesh with a capacity of 3.4

mpta.

4. Heidelberg: Recently, Heidelberg cement has entered into an equal joint venture

agreement with S P Lohi controlled Indo-Rama cement. Heidelberg cement is

expected to take 50 percent controlling stake in Indo Ramas grinding plant of

0.75 mtpa at Raigad in Maharashtra. Heidelberg is also taking over the

Mysore Cement KK Birla group at a consideration of US $ 93 million.

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The Top Ten

The consolidation of the cement companies has lead to the top ten cement companies

dominating cement production in India.

As on March 2007:

1. ACC is the largest player with a capacity of 18.64 mtpa.

2. Ultratech Cemco ltd. Now occupies the second slot with a capacity of 17 mtpa.


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3. Gujrat Ambuja group has emerged as the third largest group with a capacity of

14.86 mtpa.

4. Grasim ranks fourth with a capacity of 14.12 mtpa.

5. Other leading players include India Cements, Jaypee Group, Century textiles,

Madras cements, Lafarge cements and Aditya Birla corp.

NAME OF THE MAUFACTURER 2001 2002 2003 2004 2005 2006

ACC LIMITED 11.20% 12.20% 12.80% 13.50% 13.00% 12.60%

ULTRATECH CEMENT COMPANY LIMITED 11.90% 11.10% 10.50% 10.10% 10.10%

9.70%

GUJARAT AMBUJA 10.60% 8.70% 9.50% 10.10% 11.30% 10.60%

GRASIM INDUSTRIES LIMITED 9.20% 10.30% 10.90% 10.90% 10.30% 10.30%

CENTURY TEXTILES AND INDUSTRIES

LIMITED 5.40% 5% 4.80% 4.80% 4.80% 4.70%

BIRLA CORP LIMITED 4.20% 4% 4.10% 4.10% 3.90% 3.60%

THE INDIAN CEMENTS LIMITED 7.30% 5.80% 5.40% 5.40% 5.10% 5.90%

JAIPRAKASH INDUSTRIES LIMITED 2.30% 3.80% 3.80% 3.60% 4.30% 4.50%

LAFARGE 3.80% 3.90% 3.40% 3.20% 3.40% 3.20%

OTHERS 34.10% 35.20% 34.80% 34.30% 33.70% 34.80%

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ENVIRONMENT ANALYSISPORTERS MODEL

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Sustained growth

Top players like ACC and Aditya Birla Group have reported higher production and

dispatches in 2006 as compared to figures of the corresponding period in 2005.

ACC: ACCs January 2006 cement production stands at 11.13 mt and dispatches at 11.08


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mt as compared to 10.28 mt and 10.3 mt for January-July 2005.

Grasim and UltraTech: The Aditya Birla groups combined dispatch of cement and

clinker during April/August 2006 is 12.73 mt is up by 6.6 percent over the corresponding

last year. The combined dispatch of cement and clinker at 2.33 mt in August 2006 is

higher by 4.9 percent over Aug 2005.

Given the sustained growth in the housing sector, the governments emphasis on

infrastructure (at both national and state level) and increased global demand, the outlook

for Indias cement Industry is exceedingly high.

As discussed above, the cement industry is witnessing a number of Mergers &

Acquisitions (M&As). The extent of concentration in the industry has increased over the

years. This concentration is mainly because of the focus of the larger and the more

efficient units to consolidate their operations by restructuring their business and taking

over relatively weaker units. The relatively smaller and weaker units are finding it

difficult to withstand the cyclical pressure of the cement industry. Some of the key

benefits accruing to the acquiring companies from these acquisition deals include:

1. Economies of scale resulting from the larger size of operations

2. Savings in the time and cost required to set up a new unit

3. Access to new markets

4. Access to special facilities / features of the acquired company

5. And, benefits of tax shelter.

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2.1. Market Structure

Predominantly there are four types of competition in a market :

1) Monopolistic competition


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2) Oligopoly a) Duopoly

b) Triopoly etc..

3) Perfect Competition

Oligopoly- Oligopoly is said to prevail when there are a few firms or sellers in market

producing or selling a product in other words when there are two or more than two, but

not many, producers or sellers of a product oligopoly is said to exist.

1) Market Share- In the context of Indian cement industry falls under the

oligopolistic competition as majority of the market share is controlled by a few

players. The graph below depicts the above mentioned statement.

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2) Group Behavior -

Cartelization

A cartel is a group of formally independent producers whose goal is to increase their

collective profits by means of price fixing, limiting supply, or other restrictive practices.

Cartels typically control selling prices, but some are organized to control the prices of

purchased inputs and this phenomenon is known as cartelization.

In the Indian cement industry the major players often resort to cartelization to increase

their profits margins by creating artifitial shortages in the market. The aforesaid statement

can be validated by the recent summoning of the major players by the Monopolies And

Restrictive Trade Practice (MRTP)

2.2. Demand and Supply of Cement industry in India

Factors affecting the demand of Cement

1. Economic growth

2. Industrial activity


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3. Real estate business

4. Investments in core infrastructure projects

5. Population

6. Number of consumers

Economic Growth- Cement industry is an industry whose demand depends upon the

economic growth of the country because a high growth rate will require a good

infrastructure which will require cement thus driving its demand .In the Indian context it

is a very important factor as now the economy of the country is growing at 8.9% of GDP.

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Hence, the demand for quality infrastructure has increased. Many mega projects such as

the metro rail project in many cities of India is an example where growth rate has

influenced the demand of cement.

Industrial Activity- Industrial activity directly influences the demand of cement. A

growth in the industrial activity influences the demand for cements directly as cement is

the basic raw material which is used in the construction process. As we know that India

is now among the two fastest growing economies of the world and hence there are a huge

number of industrial projects in the offing such as POSCO in Orisssa, Mittal Arcelor etc..

Investments are also coming up in the hydel power sector where there is no substitute for

cement. Hence we can say that there has been an increase in demand due to the increase

in industrial activity.

Real estate sector- As the nation today is witnessing a high growth rate consequently the

real estate sector is also witnessing a boom. The demand for office spaces, Residential

complexes has increased by leaps and bounds it is estimated that New Delhi alone will

require a two times increase in hotel rooms due to the commonwealth games. The

demand for residential spaces has also increased due to an increase in population etc.

Investments in the core sectors India is now a preferred destination for investments in


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recent years. India has seen major corporate houses setting up shops in India including

Greenfield projects of POSCO, Arcelor-Mittal to name a few. This has led to an

increase in demand of cement.

Population- India is the second largest populated country of the world. As a result of this

the demand for housing has increased which has led to a no of housing projects coming

up which has driven the demand for cement.

The graph below gives the demand for cement for the year 2006. As we can see that the

demand is highest in the month of August which drops down to its lowest value in the

month of September and again rises in the month of December.

Changes in the price of related goods- Demand for a good is also affected by the price

of the other goods especially those which are related to it as substitutes. Therefore when

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the price of related goods falls the demand for that good decreases and when the price of

the related good increases the demand for that particular good rises.

In the context of the cement industry this factor is more or less insignificant as there are

no close substitutes. Steel and glass are trying to emerge as an alternative to concrete but

it is still far away from being a supplement to cement.

Number of consumers- The greater the number of consumers greater is its demand .

As there are a large number of real estate developers with a flurry of new projects the

demand for cement is on the rise.

Elasticity of Demand

Price Elasticity of demand is defined as the percentage change in quantity demanded

resulting from one percent change in the price of the good, other things remaining

constant.

Ep = Percentage change in quantity demanded

Percentage change in price


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The demand for a good is said to be inelastic if a change in price howsoever large causes

less than proportionate change in the quantity demanded i.e

%change in quantity demanded < % change in price

Ep < 1

The demand for cement is inelastic in nature ie, a small change in price produces less

than proportionate change in the quantity demanded. The market for cement can be

termed as oligopolistic in nature ie, a small number of players control the majority of the

market share this is because the entry barriers to this sector is quite high and hence only

about 10 players control majority of the market share.

Determinants of Elasticity of Demand

Closeness of substitutes As cement has no close substitutes hence we can say that

closeness of substitutes doesnt play an important role in determining the elasticity of

demand. Although some big players in the construction industry have started using steel

structures with glass to build integrated structures but this concept is in nascent stage in

India and hence we can not consider this to be a true substitute for concrete structure.

Effect of elasticity on revenue As cement has an inelastic demand hence we can

infer that as revenue decreases when price decreases as the percentage change in quantity

demanded is less than the percentage change in price.

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Supply of Cement in India

Factors affecting the supply of cement industry in India

1. Price of factors

2. Taxes and subsidies


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1. Price of Factors- In general when the price of factors namely labor and raw

materials increases the cost of production increases as a result the supply

decreases.

In case of cement the main raw material for is limestone if the price of limestone

increases the cost of production increases resulting in decrease in supply.

2. Taxes and subsisdies- Taxes and subsidies influence the supply of a product. If

an excise/ sales tax / duty is levied on a product then the firm will supply the same

amount at a higher price or a lesser quantity at the same price ie, imposition of

sales tax causes a leftward shift in the supply curve.

The government levies taxes and excise duties to control the inflation rate. In case

of the cement industry in India the price of cement was increasing, there was

rampant cartelization and RBI had exhausted all its resources to control the

inflation and the demand was still robust even after price hike.

2.2. Pricing Strategy of Cement

Since cement industry is oligopolistic in nature, few characters which are found in

oligopolistic market also affects here in determining the price of cement.

The most important factor is the interdependency of various players in decision making

which comprises the industry. Because in this segment since the major players are few,

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the change in price by one player directly affects the price, output or product of its rival

player which then retaliate by adjusting his price.

Another important factor in price determination is the advertising expense. In view of the

fact that a firm in a oligopolistic industry competes by changing the advertisement cost,

quality of product, price, output etc, the presence of competitive condition can hardly be

denied.

The third aspect which determines the price of cement in an oligopolistic environment is


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group behavior. Do the members pull together in promotion of common interests or will

they fight to promote their individual interest is going to determine the price.

GAME THEORY

The game theory seeks to explain what is the rational course of action for an individual or

firm who is faced with an uncertain situation, the outcome of which depends not only

upon his own action but also upon the actions of others who too confront the same

problem of choosing a rational strategic course of action. In the case of oligopoly markets

the various possible alternative strategies which are relevant are

1. Change in price

2. Change in level of output

3. Increasing advertisement expenditure

4. Varying the product

Various rules of game theory which are practiced in an oligopolistic economy are

described briefly below and depending on these principles how the price of cement is

determined is also discussed here.

1. If the player in an oligopolistic economy are competitive and are non-cooperative then

ultimately industry price and also the quantity of production tends towards perfectly

competitive market. The price cutting strategy and relative low price is an outcome of

this.

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2. The 2nd rule states that if the player in the oligopolistic economy decides to collude

among themselves rather than competing among themselves, then both price as well as

production tend towards monopolistic trends. This is the case of cement sector in India.

In Indian context few major players like ACC, Grasim,Lafarge, Ultratech, Ambuja

generally decides the price of cement. In the case of such co-operative equilibrium when

players act in unison and set strategies to maximize joint payoffs. They often form a


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cartels setting high price and dividing all profits in equal proportions but it is not always

easy to achieve and sustain co-operative monopoly as cartel and collusion are basically

restrained and are considered to be illegal in most of the market economies. But the

loophole in the law is that it is very difficult to detect cartelization.

3.In many cases there is no stable equilibrium for the oligopolistic market . Strategic

interplay often leads to unstable outcomes as firms start indulging in price wars,

capitulation to stronger firms, punishing weaker players etc. Recent frequent mergers and

acquisition taking place in the cement industry is an example of this.

The Collusion Game

It states that a cooperative equilibrium comes in to play when the players in oligopolistic

market act in unison to find strategies which will maximize their joint payoffs. So this

can be termed as collusive oligopoly.

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Here DA is the demand curve for a player A and the assumption is that other few players

also follows A in increasing or lowering the price. So the firms demand curve has the

same elasticity as the Industries demand curve. So the market share remains unchanged.

Here maximum profit equilibrium reaches at point E, the intersection of firms Marginal

cost(MC) and marginal revenue(MR) curve. The optimal price for collusive oligopolistic

is shown as point G on DA just above point E.

2.4. Construction chemicals as a complimentary product to cement

Construction chemical is a generic name assigned to describe a wide range of chemicals

that are used in pre and post-construction stages. Construction chemicals are used as an

additive to concrete/mortar or as an application on masonry surfaces. These chemicals

modify and enhance the properties of concrete in fresh and hardened state. A large


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variety of formulations and chemistries are used for diverse applications during both pre

and post-construction stages in order to impart special properties to concrete structures.

For the sake of convenience, construction chemical market can be segregated into,

1. Admixtures

2 .Flooring Compounds,

3. Repair & Rehab and other products. (Examples are Grouts, Adhesive etc)

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4. Water Proofing Compounds

Complementary good is defined as a good that should be consumed with another good;

its cross elasticity of demand is negative. This means that, if goods A and B were

complements, more of good A being bought or consumed would result in more of good B

also being bought or consumed.

Now since the application of construction chemicals are directly related to the use of

concrete/cement products, it can be very well categorized as a complementary good to

cement.

The Indian Construction Chemical Industry.

The Indian construction chemical industry, termed as a `sunrise industry`, is already

showing colours .From a scratch in late nineties this industry has emerged as a force to

reckon with having an annual turn over of more than 350 crore and is growing at a rapid

pace. Easy adaptability to foreign technology and the entry of foreign companies in the

construction sector have helped to change the mindset of the people that has eventually

resulted in quicker growth of the construction chemicals sector. The major players

present in this sector in India are FOSROC,CICO,MBT ,Dr FIXIT, etc

As per the estimation , out of the total construction chemicals (exploited market at this

stage), Admixtures contribute about 30-33 percent, industrial flooring about 20to 23

percent, water-proofing products about 20 percent, repair and rehab products 15 percent,


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and the rest is contributed by sealants and other auxiliary products.

Major factor attributed to the growth of construction chemical Industry

1. For several projects funded by multilateral agencies like the ADB and World

Bank, the use of construction chemicals is mandatory.

2. The new skill set practiced by skilled worker force in construction activity

now a day due to the boom in this sector made it possible the extensive use of

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construction chemicals, as construction chemicals are sensitive products and

its use requires basic technical expertise.

3. Since the use of Ready Mix Concrete (RMC) is the norm of the day and this

product ultimately demands higher workability for a longer period as it is to

be transported from one place to another, so use of admixture is must for this.

4. It is used to impart more strength to concrete at pre and post construction

stages and hence used extensively now a day.

So it can be concluded that rapid growth in construction industry has resulted

in rapid growth of cement industry and ultimately the growth of construction

chemicals as complementary goods to cement

2.5 . The implication of indirect taxes on the cement industry in India:

Cement is a capital intensive sector. Thus the industry has always shown that the impact

of direct and indirect taxes on this core infrastructure product has always been high. With

levies ranging close to Rs. 1000 per tonne or Rs. 50 per bag this is close to the highest tax

rate that the sector pays in any other country. The fact is that in the past several years

cement was sold at an un-remunerative price (due to governmental regulations viz. price

rationing) but recent liberalization(opening up to demand-supply forces) of the sector due


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to market dynamics has resulted in a more reasonable price for cement. But the

government believes that the current price of cement is still very high, vis--vis the

international price. Thus the government in a bid to reduce the burden on the end

consumer, and to promote imports, has decreased the import duty for cements to zero.

But inspite of all these limitations on them the cement manufacturers are of the view that

the price of cement in the country is competitive with respect to the international prices.

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The following table shows the effect of indirect taxes on the price of 1 ton of

cement in the country as on financial year ending 2006.

This table clearly shows that the sum total of the levies on the sector viz. ( excise duties,

sales tax, royalties on limestone and Coal, Cess et al) is quite high. The industry has

always pleaded for a reduction in the tax rates, in order to reduce cement prices which it

can ultimately pass on to the consumers. The industry is the second largest contributor of

excise duty. In 1980, it contributed Rs 170 crore to the exchequer, and if State and

Central levies are taken, it will be more than Rs 12,000 crore. Cement has traditionally

been the beast of burden. It carries the largest burden for an infrastructure building

material.

The Government must understand that for years they have collected a substantial levy

from the industry when the economy was in the doldrums. So it should not deny the

industry its due share of profit when the market is better and the economy is looking up.

This will facilitate much-needed infrastructure development as also the construction

activity in the country which is the need of the hour, if India has to become a developed

country.

Duties and levies on cement

(Rs/Ton)

VAT 362


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Excise 408

Royalty on limestone 69

Royalty on coal 22

Duties on power tariff 27

Octroi 23

Others 20

Total 931

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Budget 2003-04 Budget 2004-05 Budget 2005-06

Excise duty on cement hiked

by Rs 50 to Rs 400 per tonne.

Major announcements on the

infrastructure side including

roadways, airports and

convention centres.

Tax breaks on specified

housing projects have been

extended till 2005.

Additional 2% education cess

on all direct and indirect tax.

Customs duty on pet coke

reduced from 20% to 10%

Excise duty on clinker

increased to Rs 350 per tonne

from Rs 250 per tonne.

Customs duty on cement


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reduced from 20% to 15% in

line with the reduction in peak

customs duty rate.

Deduction of upto Rs 1 lakh on

the repayment of principal

amount of housing loan.

Cement has an inelastic demand curve,(owing to the relative unsubstitutibility) i.e. even

if there is a upward shift (increase) in prices of cement even then the demand does not

decrease or vary to a large extent. In such a scenario the basic concept of the tax

implication on the demand-supply dynamics is given as follows:

Since the manufacturers (sellers) know that even if the tax burden (set by the

government) is passed on to the consumers (buyers) even then there is no loss from their

side, cause the demand remains the same. Thus the entire tax burden is passed on to the

end consumer, as a result the price of cement goes up. Thus in-effect the consumer has no

alternative but to pay the higher prices. Incase of the domestic cement industry the

government has tried to nullify this increase of price (by the domestic players) by cutting

down on the imports duty on cement, thereby hoping to increase the supply from abroad.

To understand this concept better lets study the following graphical depiction:

In this graph the demand is shown by the line DD, now this is a straight line given the

inelastic demand. The supply is shown by the lines SS(before excess tax) and SS(after

excess tax). Now when the market forces were allowed to control the price the price was

at P, however when the government decided to impose additional tax to the industry then

the cement manufacturers (suppliers) decided to pass the burden to the end consumers

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(buyers). Hence the price of cement went up, and the consumers had to pay higher money

for the same quantity ofcement. So in this case the tax is given by (p-p) which is the


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extra money that buyers had to pay.

The effect of price rationing on the industry

Till the year 1982 the cement industry was subjected to unlimited regulations by the

government, the government used to set a fixed price at which the sellers had to sell their

produce. The market dynamics had no influence on the pricing. In view of this limitation

that was imposed on the industry the cement prices remained at artificially low levels,

inspite of the sustained demand. The manufacturers had to stick to the predetermined

price set by the government, hence this affected their profit margins of the companies to a

large extent.

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Lets try to understand this through a graph:

In this graph the demand (DD) supply(SS) dynamics determined the equilibrium price of

the cement. Now due to governmental intervention on the price, the price was kept very

low, i.e price ceiling was established. At this price the cement manufacturers did not have

the incentive to produce more and more cement because their profit margins were

considerably decreased. Thus although there was sustained demand in the market, the

suppliers were only (producing/supplying) Q quantities of cement. This led to a severe

shortage (shown by the portion AB) in the period prior to the early 1980s.

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2.6. Demand estimation

Demand for cement is forecasted and tabulated in the Table --------.

Assumptions made :


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1. Demand for cement is inelastic .

2. The variables for demand estimation are Price, Annual Production , Population ,

GDP . These are directly related to the drivers of demand.

3. GDP will not change drastically and will continue to show the rising trend .The

growth rate will be sustainable.

4. Price per bag used in calculation is the average price of cement per bag (50 Kg

bag). Cement has a fragmented market and the price per bag differs from one state

to other state depending upon the duties. Also, the local players charge lesser

price than players having national presence.

5. Production increased by 14mtpa (million tons per annum) within a short span of

one year , from 2005 2006due to entry of foreign players like Holcim and

Lafarge who are leaders in the cement globally. But, we have assumed for the

purpose of forecasting that production will not rise drastically .Their expansion

plans to meet the rising demand , green field projects as well as brown field

projects , is not taken into account because investment depend upon the

prevailing market situation which is highly uncertain.

6. Linear model is used to estimate demand.

7. Variables are also forecasted.

Regression Analysis was carried out using Microsoft Excel and the result is shown in

..appendix nofor a confidence level of 95 %.

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The residual plots (figure no._____ show that the assumption of a linear model is

appropriate as the points are scattered evenly above and below the reference line.

From the regression analysis we obtain the following equation:

Y = 0.5484Xg + 0.775Xpo + 0.80876XPdn 0.0138Xp 56.3568

Where Y = Demand in million tons per annum


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Xg = GDP in percentage

Xpo = Population in crores.

Xp = Average price of a 50 Kg bag

Xpd = Annual Production in million tons per annum.

We have already analyzed that demand for the cement is inelastic and discussed the

drivers of demand. For an elastic good, with the increase in price the quantity demanded

will decrease but for cement we have observed that the increase in price has not affected

the demand and hence we can conclude that it is price inelastic.

Thus , we can not directly correlate the variables average price ( Xp ) and Demand (Y) of

cement.

If the present growth rate of economy is sustained then the government will increase the

infrastructure spending which will further increase the demand of the cement.

YEAR

GDP IN

PER POP IN crs PRICE PDN CON

Xg Xpo Xp Xpd Y

2000 5 100.1 120 94.2 87.6

2001 5.6 102.86 140 93.6 90.3

2002 6.3 104.59 150 102.4 99

2003 8.5 106.54 165 111.4 107.6

2004 7.5 108.12 170 117.5 113.9

2005 8.4 109.71 185 127.6 123.1

2006 8.9 111.42 195 141.8 135.6

2007 9 113.1043 195 146.407 140.77

2008 9.2 114.7677 200 149.0426 144.0378

2009 9.4 116.4127 204.954 151.6782 147.3563

2010 9.5 118.0409 207.41 152.996 149.5255

2015 10.5 125.9729 231.97 166.174 165.6596


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2020 11 135.324 244.25 172.763 177.5345

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A number of green field projects are coming up especially in limestone rich states like

Andhra Pradesh and Himachal Pradesh which will increase the production capabilities of

companies.

3. Findings

1. Demand estimation- As the country marches ahead in its bid to become a

superpower, the increased spending on infrastructural development will be the be

the primary driver for the growth of the industry. Using regression analysis it was

found that the demand for cement will be in tandem with the corresponding

growth in GDP.

2. Pricing strategy- Cement price is determined by the oligopolistic market

behavior and theory of collusion (Game theory) plays an important part in

deciding the price.

3. Indirect taxes- The impact of indirect tax is very much pronounced in case of the

cement industry. Owing to its inelastic demand, cement manufacturers invariably

pass on the tax burden to the end consumers.

4. Complimentary goods- Construction chemicals like admixtures waterproofing

compounds etc.. can be considered as complimentary goods to cement . The

recent growth trend of these products supports the above mentioned view.

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4. Conclusion and Recommendations

We have observed that the demand for the cement looks robust and our view is further

augmented by the fact the budgetary provisions done by the government for infrastructure

spending is increasing. From the demand perspective, cement demand in the medium

term is expected to grow by around 9%. The Planning Commission's Working Group on

Cement Industry predicts cement production in India to grow at a rate of 10% during the

next five year plan. And they have further predicted that Growth of 9% per annum from

FY2006-10 would result in cement production to around 190 mt in FY2010.

Even though we have 59 cement players in India but we have observed that the top ten

dominate the entire market and rest are dominant only in the local segment. So, it can be

concluded that the market structure is oligopolistic in nature .

Cement enterprises are the favourite flavour of competition authorities around the world.

This is because they almost always collude as a cartel and fix prices, thus adversely

affecting the market. In India, the scene is no different. But they have never been

prosecuted, because our extant competition law, the Monopolies and Restrictive Trade

Practices (MRTP) Act, is just not adequate to deal with them. This is one reason why we

adopted a new Competition Act in 2002, but it remains dysfunctional, awaiting

amendments in the Parliament .

What the government can facilitate?

Mining and green field projects

1. Streamlining the limestone mine licensing policy in line with the consolidation

within the industry and should encourage new capacity additions in the coastal

districts .

2. Simplifying and streamlining the process of leasing limestone mines and reduces

the number of agencies involved in the process .

3. Increasing the ceiling on the mining area that can be held by a single company, in

tune with the requirements of the industry.


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4. Encouraging creation of additional grinding capacities near demand points

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5. Incentives for mini cement plants for contract grinding

6. Incentives for large cement plants putting up grinding units based on availability

of blending material

7. Incentives for large cement plants sourcing the clinker from kilns set up near

lime-stone mines in remote locations.

Manufacture

1. Identifying the best cement plants (which compare favourably with global

standards of operations) in the country based on agreed technical and operational

parameters, (including nearness to the sea) and promoting exports from these

plants

2. Providing the identified plants with preferential mining leases, statutory

clearances and liberalise other statutory requirements which would otherwise add

on their cost and competitiveness.

3. Creating special cement export processing zones on the lines with other EPZs,

SEZs, in areas within 300km of the coastline to promote export oriented cement

manufacture

4. Lowering the import duties on coal used by cement plants on par with the reduced

duties for coal imported by other industries (eg.: steel manufacturers)

5. Encouraging fuel management enterprises, to whom cement manufacturers

outsource the activities related to fuel management

6. Providing tax and other incentives for the same and exploring the possibilities of

bringing in participation from the industry

7. Directing state governments to remove restrictions on choice of power source

imposed on the cement manufacturers


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8. Incentivising the cement companies to source / develop the technology for power

cost reduction, eg.: Cogeneration, Waste heat regeneration etc

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Grinding Blended Cement

Removing the restrictions on usage of blended cement (of acceptable quality) for

large infrastructure projects

Packing

1. Introducing policy initiatives to discourage the usage of packed cement bags for

large infrastructure projects and by ready mix concrete plants.

2. Incentivising setting up of bulk handling facilities especially in coastal zones, to

enable competitive exports

Logistics

1. Introducing policy measures to represent to the railways to endow a favoured

preferential treatment to cement on par with coal and petroleum products

2. Promoting cement specific inland waterways and encouraging development of

inland ports and handling facilities dedicated to cement

3. Identifying major / minor ports that would be able to support the requirements

of cement exports from major clusters

4. Removing the restrictions on constructing port based cement handling facilities

Finance

Sourcing inexpensive global funds and on-lending the same to the Indian cement

manufacturers, thereby reducing the cost of finance for the Indian cement industry

Consolidation

1. Developing a suitable exit policy for enabling easy reorganisation of

manufacturing capacity to increase the overall competitiveness of cement

manufactured in India


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2. Encouraging consolidation by providing access to the inexpensive funds from

global sources to the large Indian players intending expansion / lateral

consolidation within Indian industry

How the industry can assist?

Manufacture

1. Proactive investments in introduction of technology for flexible fuel operations

2. Proactive creation of organized markets for alternate fuels for domestic / imported

alternate fuels such as agricultural wastes, tyres etc.

3. Commitment for usage of alternate fuels, especially no ash fuels such as natural

gas .

4. Outsourcing power generation to specialized utility companies.

5. Commitment to invest in efficiency improvement of the older plants in a timebound

manner

Grinding Blended Cement

1. Proactive investments in pozzolona material handling facilities

2. Proactive development of independent bodies to manage the supply and

distribution of pozzolona material on a cluster basis (on line with shared

infrastructure for limestone and coal handling).

Packing

Proactive investments in Bulk material handling and transport facilities to bring

down the overall cost of cement .In India still the concept of selling cement in

50Kg bags prevail which increases the packing charges , material handling

charges where as in developed countries cement nowadays primarily is sold in

bulk and by this approach they are able to cut down the costs.

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Logistics

Cement is a highly capital incentive industry and majority of the players of this sector

here operate on very low profit margin .Cost incurred on logistics are very high and that

is the reason why cement needs to be sold near to the factory . Following measures can

be suitable for the industry

1. Proactively pursuing common cluster based approach for railway siding and

railway transport handling

2. Proactively pursuing common service providers (experts) for logistics handling,

across multi-modal transport facilities of road, water and rail - in line with

Automotive Industry

3. Proactive industry investments in feasible cement handling ports at identified

centres

4. To have grinding units away from the plants . Clinker can be transported to these

grinding units which can be set up in neighboring states and the product can be

marketed to a larger segment.

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5. References

1.Ahuja , H L , Modern Microeconomics . 12th edition , S.Chand.

New Delhi.

2.Nordhaus , Samuelson , Economics . 18th edition , Tata MacGraw

Hill. New Delhi.

3.Microeconomics , ICFAI Centre for Management research.


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4. www.wikipedia.edu.

5. www.icra.in.

6. www.acclimited.com.

7. www.cma.com.

8. Statistical report SRS , Registrar General of India

Levine , Stephan , Statistics for Managers Using

Microsoft Excel ,4th edition , Prentice Hall of

India. New Delhi.

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6. Appendix

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.9996968

R Square 0.9993936

Adjusted R

Square 0.9989894

Standard Error 0.675842

Observations 11

ANOVA

df SS MS F

Significance

F

Regression 4 4516.9685 1129.2421 2472.2743 8.914E-10

Residual 6 2.7405748 0.4567625


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Total 10 4519.7091

Coefficients

Standard

Error t Stat P-value Lower 95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept -56.356835 36.999524

-

1.5231773 0.1785458 -146.89141 34.177737

-

146.89141 34.177737

GDP IN PER 0.5484018 0.3539216 1.5495009 0.1722358 -0.3176131 1.4144167

-

0.3176131 1.4144167

POP IN LACS 0.6753018 0.4542895 1.4865009 0.1876998 -0.4363047 1.7869082

-

0.4363047 1.7869082

PRICE -0.0138146 0.0783881

-

0.1762336 0.8659083 -0.2056233 0.177994

-

0.2056233 0.177994

PDN 0.8087695 0.0399749 20.231907 9.473E-07 0.7109543 0.9065846 0.7109543

0.9065846

A.1 Regression Analysis output


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A.2 Residual plot of GDP growth rate

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A.3 Residual plot for price

A.4 Residual plot for production

A.5 Residual plot for population

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A. 6 Graph showing the rise in production as compared to GDP

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A. 7 Graph showing the rise in price of cement as compared to GDP

Documents

162-Cement Industry in India