2012 CemWeek India Cement Sector Sentiment Survey

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GLOBAL CEMENT INDUSTRY. KNOWLEDGE. JUNE 2012

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CemWeek’s IndIa Cement seCtor sentIment survey

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FOREWORD

he CW Group is pleased to release the 3rd Annual India Cement Sector Sentiment Survey and share the findings with the cement sector. In three short years, the CW Group has established what has become an industry-standard survey, not only for India but for other regions worldwide. We thank the global cement professionals for

their contributions to this unique research, which reveals the views of the individuals making up the fabric of this exciting industry.

This survey would not have been possible without the dedicated support of a few organizations that have shown particular dedication to the Indian cement sector and to understanding the sentiment among its professionals. These companies include: Cachapuz, KHD Humboldt Wedag, Lindner, and Loesche. We also thank the India Cement & Construction Materials journal for its support.

As a leading cement sector research house, the CW Group recognizes the analytical limitations of the survey format. Although well over 400 respondents participated, we do not think this survey tells the entire story, nor does it provide all the answers. What we do hope is that it provides food for thought and a starting point for discussion. Do not hesitate to contact us should you wish to continue the dialog and hear more about our views.

robert madeIraManaging Director and Head of Research, CW GroupE: [email protected] | T: +1-702-430-1748

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The IndIa cemenT SecTorThe Indian cement industry has experienced both ups and downs during the past years while maintaining its position as the world’s second largest cement producer, following China. The total cement capacity in India reached an estimated 323 million tons last year.

FY 11-12 began with the expectation of a brighter outlook and projections of double digit growth for the Indian cement sector, but reality was much more conservative, with overall growth rising just six percent over 2010.

Demand increase was also slow due to factors such as the global economic slowdown, an extended monsoon season, and delays in execution for key infrastructure projects. In FY11-12, cement demand registered moderate 6.35 percent growth, with the industry selling 223.8 million tons compared with 210.4 million tons in FY10.

Production picked up 6.1 percent, and total output for the four quarters increased from 211.48 million tons in FY10 to 224.39 million tons in FY11-12. Poor demand growth coupled with new lines producing at full capacity—despite the earlier rates and inventory carried over from previous year—determined a fall in capacity utilization across the country from 78 percent in FY10 to almost 70 percent FY11-12.

Rising input costs are a key challenge for the cement industry, particularly energy, raw materials and distribution. In FY11-12, increased production costs came mainly from changes in freight rates and coal prices and directly influenced cement prices. Average cement prices in India rose nine percent to Rs 265/bag from Rs 243 in FY10.

ALL INDIA PRODUCTION AND DEMAND (mm ton)

200

300

400 Production Demand Available capacity

FY13-14EFY12-13EFY11-12FY10-11

MARKET OVERVIEW

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The cement sector is cyclical, and the last two fiscal years can hopefully be considered a weak patch, if not a trough, in the otherwise strong “super cycle.” Short to mid-term growth is likely to be driven largely by government initiatives in the infrastructure and housing sectors. These two sectors represent, respectively, 17 percent and 60 to 70 percent of India’s cement consumption.

With consumption growth under pressure, industry forecasts for cement demand reveal a robust eight to nine percent growth for the next two years. Over the longer term, growth prospects are favorable and economic development acceleration is expected, with US$ 1 trillion earmarked for infrastructure developing under the 12th Five Year Plan period (2012-2017). The plan aims to construct 1.2 million housing units and improve highway, major district and city road development (25,000 km of road development and maintenance are projected).

Indian cement production is expected to hit 480 million tons by 2017 according to some estimates. Despite the current cement oversupply, the major players intend to expand their installed capacity on the backs of planned government construction projects. An incremental capacity increase of 30 million tons by FY13 is already underway: 64 percent is equally split between the eastern and southern regions, followed by 16 percent in the western, 14 percent in the central, and one percent in the northern region. Furthermore, an additional 22 million tons are expected to be commissioned during FY14.

Excess capacity should be absorbed by cement demand growth (~8% in FY13) coupled with a slowdown in capacity expansions. However, with effective capacity still outpacing cement demand, capacity utilization is expected to remain below 80 percent for the next two years.

Some of the new cement projects expected to be completed by the end of 2014:

Company projeCt CapaCIty (mtpy) operatIonal

Heidelbergcement ■ 1 grinding unit in damoh

■ 1 grinding unit in Jhansi2.9 August 2012

AmbuJA cements ■ clinker station unit in nagaur, rajasthan

2.2 2013

JAypee cement corporAtion ltd

■ integrated cement plant in shahabad dist., Karnataka

3.0 september 2013

sAngHi industries ■ expansion of the gujarat facility

1 Q4Fy13

lAFArge

■ 4 greenfield projects in rajasthan, Karnataka, meghalaya and Himachal pradesh

2 Fy13 and Fy14

JK lAKsHmi cement ■ expansion in Ahiwara, durg dist., chhattisgarh

1.3 2013

ultrAtecH

■ brownfield expansion at chhattisgarh and Karnataka together with additional grinding units

10 Q1Fy14




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After a promising start for FY12-13, the ban on sand mining implemented April 1st interrupted construction activities, hitting both private and government projects as well as cement demand and prices. The northern and southern regions have been most affected, registering price declines of 4.3 percent and six percent MoM, respectively. Furthermore, with the onset of monsoon season, cement prices are expected to register another decline.

ALL INDIA AVERAGE PRICE (INR/bag)

200

250

300

1MFY12-13FY11-12FY10-11

MARKET OVERVIEW




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SUmmarYThe cement industry occupies an important place in the Indian economy with its strong linkages to the construction, transportation, coal and power sectors. As a result, the market perception and main priorities for the next period become more and more valuable insights. The current survey’s updated information is comparable with that collected in 2011 and permits the identification of trends in expectations, performance and challenges.

Despite a currently more challenging environment for the cement industry, the last six months’ performance was considered satisfactory, as both bottom and top-line growth were mostly achieved. An upward trend in absolute costs had been anticipated, and the increase was partially absorbed by operational efficiency exercises and partially transferred to customers. Due to rising input costs, cost control measures will remain a key theme for next year also.

Expectations for the next period are close to last year’s, with room for “a little bit more.” However, particular areas of interest have weakened:

■A “much better performance” for the next twelve months—expectations declined from 20 percent to 13 percent; ■A step up in career—21 percent are highly confident (a 3% decline) while those who consider their careers at risk doubled from two percent to four percent; ■Growth in capital expenditure—expectations decreased six percent from 63 percent in 2011; ■And the environment/emissions have reached the sector’s top three challenges, growing from nine to 15 percent.

These reflect the cumulative effects of the oversupply market, robust demand growth and rising input costs. However, the majority of respondents are expecting good results, anticipating performance at least comparable with last year.

demographIcSFor both 2011 and 2012 the sample base comprised a mix of Indian industry professionals, aiming to capture a more accurate overview from their experience, perceptions and approaches. Compared to 2011, the pool of respondents has overall remained the same, but 2012 did experience a slight increase in cement company and equipment vendor involvement.

SECTOR PARTICIPATION

Cement trader

Other

Industry analyst, consultant

Equipment vendor

Cement company

20122011

53%

12%

56%

17%

INTRODUCTION




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FUncTIon and organIzaTIon LeveLThe companies that participated in the survey represent a variety of roles within the industry—from sales and marketing, production and engineering, to research, logistics and planning. The functional participation remained quite constant, between 2011 and 2012, with the main distinction being a five percent increase in the sales and marketing area.

There continues to be strong participation from senior staff in the respondents’ set. Senior staff survey involvement has consistently been over 50 percent, but a four percent increase was also registered this year.

FUNCTIONAL PATTERN

Trading and logistics

Other

Planning, finance & other administrative

Consulting and research

Production operations & engineering

Sales & marketing

20122011

39%

27%

44%

26%

STAFF LEVEL OF PARTICIPANTS

Management (eg. Regional manager, Director)

Senior management (eg. CEO, Head, GM, EVP or SVP)

Professional staff

20122011

46%

32% 33%

42%

SURVEY FINDINGS




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TEST TITLEGEOGRAPHIC PARTICIPATION

Northeast

East

South

North

West

20122011

35%

33% 29%

33%

LocaTIonThe sample corresponds to the five regions that comprise the Indian cement industry. The northern and western regions each participated about nearly 30 percent, consistent with last year’s survey, followed by the southern region which reached 26 percent survey presence (a 5% increase). The eastern and northeastern regions participated at ten and two percent, respectively.




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recenT perFormanceCompared to results in the 2011 second annual CemWeek India Cement Business Sector Sentiment Survey, the number of respondents who considered performance to be “ok” over the last six months dropped from 42 to 36 percent. On the other hand, respondents who evaluated the performance as “well” increased by four percent to 43 percent.

Based on the new results, 55 percent of respondents considered the industry to have performed “well” or “excellent,” and only ten percent believed it had done “poorly” or “terrible.” The highest performance excellence was expressed by the Eastern region at 27 percent.

The recent performance perception does not correlate with the level of expectations. Even if respondents were optimistic about the last six months’ industry performance, those who considered their expectations to at best having been met and worst nowhere near expectations, represented 72 percent. On the other hand, this percentage is eight percent lower than last year’s 80 percent. Furthermore, those who believed their expectations have been exceeded or far exceeded increased from 20 percent to 28 percent.

ACTUAL PERFORMANCE

Terrible

Poorly

Ok

Well

Excellent

20122011

42% 36%

43%39%

SURVEY FINDINGS




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In the eastern region, expressed performance excellence did correlate with the regional expectations’ level, as 39 percent of the eastern sample affirmed that their expectations have been exceeded or far exceeded.

Equipment vendors are the most dissatisfied with last year’s performance. Indeed, 52 percent of the sector sample had higher expectations that remained unmet, followed by industry consultants and cement traders.

expecTaTIonS For The FUTUrePerceptions for the next twelve months are optimistic. Although only 13 percent of those surveyed believe performance will be “much better” in the coming year, compared to 20 percent last year, those who anticipate a “somewhat better” performance increased from 33 percent to 43 percent. Overall, a majority of 56 percent expect an improved performance, followed by 32 percent who believe the current level will remain the same, while 12 percent are preparing for worse results.

PAST PERFORMANCE MEETING EXPECTATIONS

Nowhere near my expectations

Below my expectations

Met my expectations

Exceeded

Far exceeded

20122011

49%

30% 26%

44%

EXPECTATIONS FOR THE NEXT YEAR

A lot worse

Somewhat worse

About the same

Somewhat better

Much better

20122011

33%

35% 32%

43%




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SURVEY FINDINGS

In terms of expectations by segment, the most optimistic are cement traders, as 73 percent believe in a “somewhat” or “much better” outlook. They registered a startling increase from 37 percent last year. This view is further supported by industry consultants and cement companies, at 59 and 58 percent optimism, respectively. Being directly influenced by the next period’s slowdown in capital expenditure, optimism among equipment vendors dropped significantly from 87 percent to 45 percent, and the remaining 55 percent expect about the same performance.

Cement traders account for the highest level (27 percent) of respondents who believe a somewhat or much worse performance will be registered. These answers correlate with both regional performance and potential changes in demand.

In terms of profitability over the next twelve months, a majority 57 percent believes profitability will register an improvement, and 32 percent expect stagnant levels. This may be the result of the last period’s focus on cost controls and cumulative operational improvements. The remaining 11 percent are preparing to handle a profitability decrease.

Regionally, the majority of respondents expect improved profitability over the next twelve months. However, the greatest number of optimists are part of the eastern sample (72%), while the highest percentage of those expecting a decline are in the northern region (16%).

The improved outlook on profitability is shared at the staff participation level, too. Only nine percent of the senior management sample expects to register a reduction in profitability, compared with 14 percent of the professional staff sample.

Expectations about input costs have registered small changes. Ultimately, 25 percent of the respondents’ sample expects worsening levels, only one percent higher than last year results. The remaining 75 percent believe that input costs will remain at the same level or better.

Due to rising input costs, the highest cost pressure is expected in the northern and western regions, followed very closely by the southern region.

EXPECTED CHANGE IN PROFITABILITY

Decrease

No change

Improve

20122011

56% 57%

32%31%




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Major capital investments are still expected, but in a slightly lower proportion compared to 2011. Those who said their companies’ capital budget will increase in the next twelve months dropped to 57 percent from 63 percent last year. Current investment levels will be maintained by 35 percent of the respondents’ companies, a three percent increase over last year’s survey, and the remaining eight percent will choose to invest less in the coming year.

Next year’s market prospection had an influence on career prospects sentiments as well. A majority of 67 percent are fairly and highly confident in their career improvement, the same as last year’s results. Those who expect their career prospects to remain “probably the same” decreased slightly from 31 percent to 29 percent, while those who consider their careers to be “at risk” picked up from two percent to four percent.

The most optimistic survey respondents come from the cement trader segment, followed by cement companies and equipment vendors. At the same time, the highest rate of those considering their careers at risk is nine percent, a view held in both the cement trader and equipment vendor sectors. Those sectors are directly impacted by the slowdown in demand growth and capacity expansions.

EXPECTATIONS FOR CHANGE IN INPUT COSTS

Worsen

Stay the same

Improve

20122011

43% 42%

33%33%

EXPECTED CAPITAL INVESTMENT

Decrease

Stay the same

Increase

20122011

63%57%

35%32%




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Overall, a modest increase in employment is expected for the coming year. Those who said their companies will employ “a lot more” decreased two percent (from 13% to 11%). Responses indicating their companies will employ “a little bit more” increased to 53 percent from 50 percent. And 32 percent of respondents reported that company employment levels will remain the same, four percent less than last year.

An important difference compared to last year’s results is the two percent increase in layoff expectations. These come mainly from the cement trader sector, followed by equipment vendors and cement companies.

Compared to 2011 results, the cement industry’s three main themes registered slight decreases of two to eight percent. For 30 percent, “controlling costs” is now considered the industry’s main issue. After dropping eight percent, “improving domestic sales” is now ranked as the second theme at 29 percent.

Following operational improvement (10%), capacity expansion proved to be an important issue and a key focus area for the next twelve months. Capacity expansion’s seven percent showing comes mainly from respondents in the northern and western regions.

SURVEY FINDINGS

EXPECTATIONS OF CAREER PROSPECTS

At risk

Probably the same

Fairly confident

Highly confident

20122011

43% 46%

29%31%

EXPECTATIONS OF STAFFING LEVELS

Lay off workers

Remain the same

A bit more

A lot more

20122011

50%

36% 32%

53%




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The over capacity situation is being felt in all cement sectors, at all staffing levels and in four of the country’s five regions. Despite the 12 percent decrease to 33 percent, excess capacity has been ranked again as the key challenge for the next twelve months. The second greatest challenge is represented by energy costs, which registered a slight decrease of one percent compared to 2011. The environment/emissions, after a six percent increase, has moved up into the industry’s top three challenges.

The other two challenges that complete the top five are profitability and plant efficiency. Both have registered slight increases at one and two percent, respectively.

The majority of survey respondents considered it either a top priority (18% versus 16% last year) or an important focus (44% versus 48% last year) for the Indian cement industry to meet emerging US and EU emissions standards.

KEY ISSUES OF THE INDUSTRY

Environmental issues

Alternative fuels

Other

Safety and occupational health

Finding new export opportunities

Capacity expansion

Operational improvement

Controlling costs

Improving domestic sales20122011

37% 29%

30%

32%

KEY CHALLENGES FACING THE INDUSTRY

Safety & health

Other

Regulatory

Securing fuels

Shortage of skilled labor

Plant efficiency

Profitability

Environment / emissions

Energy prices

Excess capacity20122011

45%33%

16%

17%




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INDIA-US/EUROPE EMISSION PARITY

Not at all

Not so important

Neutral

Important

Top priority

20122011

48% 44%

26%21%

PROFITS VS EMISSION REDUCTIONS

No

Yes

20122011

77% 79%

21%23%

A clear interest in environmental protection has been maintained among respondents. In fact, 79 percent of survey respondents revealed their companies’ dispositions to reduce CO2 emissions by trading off profits. The current result is two percent higher than in 2011.

Overall, this willingness is regionally constant. The northeastern region is an exception. Here, 33 percent consider it unnecessary to trade profits for improved emissions, compared to less than 25 percent in the other regions. The uptick in respondents who seem more willing to sacrifice environmental performance for financial improvement may to some extent reflect the tougher trading conditions over the past 12 months.

reLaTIonS wITh eqUIpmenT SUppLIerSCement companies had the chance to express their opinions about their business relationships with the leading equipment suppliers operating in the Indian cement market. Respondents were asked to provide their input on the following companies: ABB, Aumund, Fives FCB, FLSmidth, Gebr Pfeiffer, KHD Humboldt Wedag, Loesche, Polysius, Siemens and Sinoma.

FLSmidth was widely perceived by many as the “best” or a “good” supplier, similar to the findings from the 2011 survey. ABB and KHD also ranked high in this year’s survey among Indian cement sector professionals. Interested parties may contact the CW Group consulting services to find out more about these findings.

SURVEY FINDINGS




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CONCLUSION

concLUSIonIn summary, the Indian cement industry has passed a demanding year, and the next period will be sprinkled with both challenges and opportunities. The CW Group and CemWeek’s third annual India Cement Sector Business Sentiment survey offers solid insights about sentiments held among industry participants and professionals, its main sectors and regions.

On the whole, the last six months’ industry performance was considered reasonable and met over 70 percent of the sample’s expectations. Although the level of optimism was higher in the second annual survey, the majority of respondents expect to register the same or just somewhat better performance in the next twelve months. The survey respondents have clearly pointed out the next period’s challenges, the dominant ones being excess capacity, energy prices, CO2 emissions and profitability. In order to support healthy business growth, the Indian cement industry’s main three focus areas will be controlling costs, improving domestic sales, and operational improvements. These are mainly driven by the majority’s expectations of the same level or worsening prices for input costs and at least the same results in profitability.

Please contact the CW Group at [email protected] to arrange for a more detailed discussion of this survey and its findings.




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2012 CemWeek India Cement Sector Sentiment Survey