Cement units bet on housing, highway projects

By Ramnath Subbu

MUMBAI, OCT. 6. There is some positive news emerging from the Indian cement industry after a lacklustre period of low demand and overcapacity. Now, macroeconomic factors have resulted in better demand and higher capacity utilisation for the industry. The Government's thrust on the housing sector, low real estate rates and tax incentives coupled with the road development spree with progress on the `golden quadrilateral' connecting four major metros have been contributory factors.

Majors like ACC have reported a 27.35 increase in cement despatches in September this year over the same month last year and Gujarat Ambuja Cements reported an increase of 19 per cent in despatches for the same month. ACC's despatches were 9.87 lakh tonnes against 7.75 lakh tonnes and production was 9.83 lakh tonnes in September against 7.26 lakh tonnes, an increase of 35.3 per cent.

Gujarat Ambuja reported despatches of 5.48 lakh tonnes in September this year against 4.60 lakh tonnes in the same month last year. Production was 5.79 lakh tonnes against 4.62 lakh tonnes, a rise of 25.3 per cent.

There is good news for the roads and highway projects. The golden quadrilateral is to be completed by December 2003 and the National Highway Authority of India (NHAI) corridors are to be completed by December 2007.

These projects are funded by the World Bank and Asian Development Bank (ADB) which have committed $1 billion and $1.5 billion. Mr. T. M. M. Nambiar, Managing Director of ACC, felt the golden quadrilateral would be completed in time because 4,500 km had already been done and only 1,500 km remained.

The total estimate for both projects is about Rs. 60,000 crores, covering about 13,000 km translating into Rs. 5 crores per km.

About Rs. 5,000 crores is to come in the form of diesel cess and while half of that is reserved for other roads, a part will come to NHDP. ``So the finances look to be more or less in order as there is composite scheme that has been evolved. The issue is of getting some of the procedural aspects tied up," said Mr. Nambiar.

The Cement Manufacturers' Association (CMA) has been trying to get the government to lay a significant part of the roads in cement-concrete so that ``they become a truly national asset."

The other area is housing construction. According to Mr. A. K. Jain, president, marketing, ACC, ``There are a number of bottlenecks which have been pointed out why housing has not taken off the way it should in spite of it being a basic need. Whatever initiatives have been taken so far have been in large cities. They have not even gone down to the second and third rung of cities, leave alone the rural areas."

As such, there is a major shortfall in rural housing and tax incentives have no meaning as there are few tax payers. ``Which means you need alternative mechanisms to create incentives for them on one side and you need new delivery mechanisms because the current housing finance organisations do not go beyond large cities," said Mr. Jain.

The industry is suffering from a two-year lag on the supply side. The CMA expects the industry to grow at 8-9 per cent in the current year. ``If we are able to succeed in getting the roads sector moving, in the course of next two years, we can pick up a major chunk of the surplus.

Assuming that we come back to normal growth rate in the industry, we have something that will go on for the next six years up to 2007. So every year you have 3.5-4 million tonnes of cement going to roads sector, assuming that you come back to normal growth rates," said Mr. Jain.

There is no capacity addition coming up barring Gujarat Ambuja's 2 million tonne capacity. In any case, the capacity utilisation of the industry is 80-85 per cent and the problem is that even a slight imbalance in the supply demand equilibrium creates more than a proportionate effect.

There was some controversy regarding cartellisation of cement production and ramping up of prices in the past. According to the CMA, in July, prices per 50 kg bag were Rs. 140 in Delhi, Rs. 175-180 in Chennai, Rs. 160 in Kolkata and Rs. 175 in Mumbai. At present, prices in Delhi are around Rs. 145 per bag, Rs. 145 in Chennai, Rs. 145 in Kolkata and Rs. 175 in Mumbai.

According to Mr. Nambiar, ``What is important is that the price is a fair one wherein the manufacturer gets a due reward for capital invested and at the same time it is fair to the consumer. The CMA engaged independent agents to establish the fair price which will ensure a fair return to the producer to sustain further investment. There were various pressure groups building up a bogey and it was just that. Prices had dropped to such low levels that many companies were making losses."

The CMA says that ex-factory cement price in India is the cheapest in the world. Further, during the last nine years, input costs of major components have risen between 100 per cent and 220 per cent. Also, cement is one of the highest taxed commodities in India with levies comprising 25-30 per cent.

The industry grew at 3-3.5 per cent in the first six months of the current year and according to the CMA, the second half is expected to be better and should close the year with 5-6 per cent growth. ``Next year, the industry should be able to come back to normal growth of 7-8 per cent, translating into 7-8 million tonnes of fresh demand.

This means there would be 10 million tonnes of new capacity, said Mr. Jain, adding, ``in about 18-24 months the surplus would be absorbed. The rider, however, is that demand will have to come back to normal rates.

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