Cement production is mostly localised and the industry is typically driven by a surge in construction activity and infrastructure development projects globally. An advancement in technology, urbanisation, high disposable incomes and a rise in the number of nuclear families have resulted in the growth of demand for houses and supporting infrastructure, this has led to an increase in demand for cement. The cement production world over has grown faster than the growth in the global economy, at a CAGR of 4.4% from 2010 to 2015. This was mainly driven by India and China, the two fastest growing economies in the world.
China alone contributed more than 50% of the global cement production and this is followed by India. The cement production in China stood at 2,350 million tonnes whereas, in India, this was 270 million tonnes during 2015. The production in the two major economies was driven by rapid urbanisation and a better scope of infrastructure development.
The per capita consumption of cement in China stood at 1710 kg in 2015. This rate of consumption seems high and is unsustainable by the global standards (average world consumption was 500 kg per capita in 2015), even if China has ample scope for urbanisation (currently 55%) in comparison to the developed countries (urbanisation rate of ~80-85%).
The Chinese cement industry is operating at 67% of its capacity, which is below the capacity utilisation of 72% in India. Moreover, it also faces other challenges, including regulatory bans on cement production (aimed at tackling overcapacity), a decline in land sales, increase in residential vacancy rates, high inventory levels and falling cement prices.
Although India’s cement production is 1/10th of China, but, the country seems more promising at this juncture with better cement prices (as compared to China), better capacity utilisation and more room for urbanisation and infrastructure development (in India the demand for cement from housing segment is ~67% and is 13% from infrastructure).
A comparative analysis of the top two cement producing companies in India and China corroborates that, while capacity utilisation for Anhui Conch (China) is falling for the past couple of years, it is rising for the UltraTech Cement (India). Overcapacity and excess supply impacted the cement prices adversely in China (declining more than 20% in last 2 years). Although cement prices in India are also declining as indicated below, this is due to the depreciation of rupee against the USD, while cement prices remained stagnant/declined marginally from 2012.
An examination of the cost structure provides a slightly different view. Thus, despite a sharp decline in the prices, the EBITDA margin of Anhui Conch was still greater than that of the UltraTech cement, mostly owing to the lower input costs (coal, power and freight). Energy, raw material and logistics expenses in China for every tonne of cement sold were $11.32, $3.40 and $2.90 respectively, while the same expenses in India were $14.68, $6.66 and $16.12. India has a very high cost of logistics at ~18% of the revenue due to the road transportation.
Although, the coal prices dropped from ~60$ per tonne in 2012 to ~40$ per tonne in June 2016. , India was unable to reap the benefits of the falling coal prices due to the depreciation of its currency (the majority of the coal is imported). Further, the increase in royalty by the Indian government on limestone and increase in prices of diesel inflated the cost structure. This resulted in an increase of COGS per tonne by ~5% for UltraTech as compared to a decline of ~24% for Anhui Conch from 2012-15. Despite the lower cement prices, the EBITDA margin of Anhui Conch was still higher than that of the UltraTech as stated above, owing to the higher cost structure in India. However, from 2015 the EBITDA margin improved for India because an increase in demand resulted in a better capacity utilisations.
Additionally, cement is a fragmented industry, the top 20 companies contributes more than 70% of the cement production, on the contrary, the rest of the 30% create intense competition at the regional level and thus, keep the prices low. Cement companies in both economies are under immense pressure owing to the above-stated reasons and stemmed consolidation of capacity. India witnessed 46 million tonnes of capacity change hands in the past 3 years, while in China, Anhui Conch itself added more than 110 million tonnes of capacity (through acquisition) in the same period. But, most of the consolidation took place at the top level and the industry may continue to witness small deals.
Therefore, the industry may be under more trouble as pressure on margin increases across economies. In addition, in the past two-quarters, infrastructure development has slowed down considerably in China. This severely impacted the demand for cement in the country, whereas the demand remained stagnant in India. Furthermore, Indian cement companies are expected to outperform their Chinese counterparts since there is a high level of inventory and no demand revival is expected in China in the near future.
Also Read :- Benchmarking Construction Industry in Developed and Developing World