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It’s been a pessimistic month for the Indian cement industry with Ministry of Commerce & Industry data showing that cement production has fallen year-on-year every month since December 2016. This was followed by the Cement Manufacturers Association (CMA) saying that the industry was sitting on 100Mt/yr of excess production capacity. Now, the credit ratings agency ICRA has followed the data and downgraded its forecast for cement demand growth to not more than 4% for the 2017 - 2018 financial year.

Graph 1: Annual cement production in India. Source: Ministry of Commerce & Industry.

Graph 2: Monthly cement production growth rate year-on-year in India: Source: Ministry of Commerce & Industry.

Graph 1 shows a production peak in the 2015 - 2016 financial year before falling monthly production broke the trend in the 2016 - 2017 period. Graph 2 pinpoints the month it started to go wrong, November 2016, when the government introduced its demonetisation policy. Production growth went negative the following month in December 2017 and it hasn’t managed to right itself since then and grow. It’s convenient to blame the government for the slump in production but it troughed in February 2017 before taking a lower level of decline since then.

The Reserve Bank of India (RBI) annual report in August 2017 suggests that the policy failed in its principal purpose of reducing the kind of corruption that a cash heavy economy can hide such as tax avoidance. People reportedly managed to find ways to bypass the bank deposit limit and may have successfully laundered large amounts of cash without being caught. However, as commentators like the Financial Times have pointed out, the longer term implications of forcing the economy towards digital payments and increasing the tax base could yet be beneficial overall.

Graph 3: Cement production capacity utilisation rates in India. Source: UltraTech Cement.

Moving on, the CMA has blamed production overcapacity for the current mess and Graph 3 shows the problem starkly. If anything the CMA appears to have downplayed the over capacity crisis facing India, as UltraTech Cement’s figures (using data from the Department of Industrial Policy and Promotion) show an overcapacity of 155Mt in the 2016 – 2017 year and this will grow to a forecast 157Mt in the next financial year, even though the utilisation rate is expected to rise slightly. UltraTech Cement’s estimates don’t see the utilisation rate topping 70% until the 2020 – 2021 financial year. Analysts quoted in the Mint business newspaper concur, although they reckoned it would the rate would bounce sooner, in 2019 - 2020. Last month when the CMA moaned about the industry's excess capacity it pinned its hopes on infrastructure schemes like the Mumbai-Ahmedabad bullet train. This prompted an official at JK Cements to say that he didn't think that one train line was going to make much of a difference.

This is one reason why ICRA’s and the other credit agencies’ growth rate forecasts for cement demand are important, because they indicate how fast India might be able to close the gap between production capcity and demand. Unfortunately demonetisation scuppered ICRA’s growth prediciton for 2016 – 2017. It forecast a rate of 6% but it actually fell by 1.2%! So downgrading its forecast for 2017 – 2018, with fears of weather and the implementation of the Goods and Services Tax (GST) in the second half of the year, is ominious. Major cement producers such as Ultratech Cement and Ambuja Cement have based their road to recovery in their latest investor presentations on a 6% growth rate or higher. Pitch it lower and the gap doesn’t close. Here’s hoping for a brisk second half.

There is plenty to mull over on the Chinese cement market at the moment as the half-year reports for the major cement producers are being published. Anhui Conch revealed this week a glowing balance sheet with a 33% jump in its sales revenue to US$4.79bn. It attributed the boost to a ‘significant’ increase in prices and continued discipline with production and operation costs. Although CNBM is scheduled to release its results at the end of August 2017, Anhui Conch appear to be well ahead of its next largest rivals locally as can be seen in Graph 1.

Graph 1: Sales revenue of major selected Chinese cement producers. Sources: Company financial results.

Beyond the headline figures it is interesting to pinpoint the areas in China where Anhui Conch says it isn’t doing as well. Its South China region, comprising Guangdong and Guangxi provinces, suffered from competition in the form of new production capacity, which also in turn dented prices. Despite this ‘black spot’ in the company’s regional revenue still grew its sales in double-digits by 14%.

The other point to note is the growing number of overseas projects with the completion of a cement grinding plant in Indonesia, new plants being built in Indonesia, Cambodia and Laos, and projects being actively planned in Russia, Laos and Myanmar. The cement producer also opened seven grinding plants at home in China during the reporting period. It’s not there yet but it will mark a serious tipping point when the company starts to open more plants outside of China than within it. With the government still pushing for production capacity reduction it can only be a matter of time. On that last point China Resources Cement (CRC) reckoned in its half-year results that only four new clinker production lines, with a production capacity of 5.1Mt/yr, were opened in China in the first half of 2017.

After a testing year in 2016 CRC’s turnover has picked up so far in the first-half of 2017 as its sales revenue for the period rose by 17% to US$1.67bn. Despite its cement sales volumes falling by 9% to 33.6Mt, its price increased. Given that over two thirds of its cement sales arose from Guangdong and Guangxi it seems likely that CRC suffered from the same competition issues that Anhui Conch complained about.

Graph 2: Chinese cement production by half year, 2014 – 2017. Source: National Bureau of Statistics of China.

Graph 2 adds to the picture of a resurgent local cement industry suggesting that the Chinese government’s response to the overcapacity crisis may be starting to deliver growth again. After cement production hit a high in 2014 in fell in 2015 and started to revive in 2016. So far 2017 seems to be following this trend.

Returning to the foreign ambitions of China’s cement producers brings up another story from this week with news about the Nepalese government’s decision to delay signed an investment agreement with a Chinese joint venture that is currently building a cement plant in the country. With the prime minister visiting India the local press is painting it as a face-saving move by the Nepalese to avoid antagonising either of the country’s main infrastructure partners. This is relevant because the cement industries of both China and India are starting look abroad as they consolidate and rationalise. Once China’s cement producer start building more capacity overseas than at home, conflicts with Indian producers are likely to grow and present more awkward situations for states caught in the middle.

India: Manish Bhatia has been appointed as the chief financial officer of Prism Cement. He succeeds Pramod K Akhramka who has resigned from the company. Bhatia holds over 20 years experience in corporate finance.

India: Manoj Agarwal has resigned as the company secretary and compliance officer of Star Cement, with effect from 2 August 2017. His successor is Debabrata Thakurta, a member of the Institute of Company Secretaries of India.

India: The Cement Manufacturers' Association (CMA) has elected Mahendra Singhi, the group chief executive officer (CEO) and director of Dalmia Cement (Bharat), as its new vice president. Singhi has previously served as president of the Rajasthan Manufacturers Association. He is a science and law graduate by training and also a chartered accountant.

Congratulations are due to India’s UltraTech Cement this week for finally completing its US$2.5bn asset purchase from Jaiprakash Associates. The deal has been around in some form or another since at least 2014 when UltraTech arranged to buy two cement plants in Madhya Pradesh for around US$750m. That deal, publicly at least, became a victim of the 2015 amendment to India’s Mines and Minerals (Development and Regulation) (MMDR) Act. The Bombay High Court eventually rejected it in early 2016 after a period of delays. However, the deal bounced back in a much larger form around the same time and since then everything has gone relatively smoothly.

As chairman Kumar Mangalam Birla put it in his letter to shareholders in the company’s 2016 – 2017 annual report the, “move is essentially for geographic market expansion.” He then went on to mention all the usual keywords like ‘synergy’ and ‘economies of scale’ that you expect from an acquisition. Quite rightly he finished with, “It is with great pride that I record, that UltraTech is the largest cement player in India and the fifth largest on the world stage.” On that last point he meant outside of China but UltraTech does have a small number of assets outside of India, notably in the UAE, Bahrain, Oman and Bangladesh, hinting at an international future for the cement producer.

Map 1: UltraTech Cement’s plants in India. Source: UltraTech Cement Corporate Dossier, January 2017.

To give a scale of the deal, UltraTech has increased its number of integrated cement plants in India to 18 from 12 and its cement grinding plants to 21 from 16. Its overall cement production capacity will increase by nearly 40% to 91.4Mt/yr from 66.3Mt/yr. The new assets are in Himachal Pradesh, Uttar Pradesh, Uttarakhand, Madhya Pradesh and Andhra Pradesh. The main regions that will benefit are the North, Central and South zones. In particular the Central Zone will see its capacity jump to 21.1Mt/yr from 6.2Mt/yr. This area also includes a new 3.5Mt/yr plant at Dhar in Madhya Pradesh that is scheduled for commercial production in late 2019.

The completion of the Jaiprakash Associates deal was followed by the introduction at the start of July 2017 of the Goods and Services Tax (GST), a rationalisation of some of the country’s central and state taxes. UltraTech promptly said it had reduced its product prices by 2 – 3% in light of tax reductions under the new regime. Some producers were warning of a rise in cement prices in the run-up to the introduction of the GST and the Cement Manufactures’ Association said that the new tax rate was insufficient. However, UltraTech said that the new tax rate of 28% was better than 30 – 31% previously. Other Indian producers also reduced their prices this week following the introduction of the GST.

UltraTech’s expansion and the start of the new tax scheme auger well for the Indian cement industry in 2017. Demonetisation knocked cement production at the start of the year and it may have lowered UltraTech’s capacity utilisation rate as well as reducing domestic sales by cutting housing demand. However, sector rationalisation and a simpler tax approach should help to remedy this. Not all government interaction has been helpful to the cement industry in recent years as the MMDR amendment and demonetisation show but the signs are promising.
Roll on the next set of financial reports.

India: Prism Cement has appointed Raveedra Chittoor as an additional director to its board. Chittoor holds a post graduation qualification from the Indian Institute of Management in Ahmedabad and is a Fellow of Management from the Indian Institute of Management in Calcutta. He has 12 years of industry experience in corporate finance and investment management. Chittoor is currently an associate professor at the Gustavson School of Business at the University of Victoria in Canada. Prior to this he taught at the Indian School of Business in Hyderabad and the Indian Institute of Management in Calcutta.

India: P R Ramasubrahaneya Rajha, the chairman of business conglomerate Ramco Group, has died at the age of 82 after a brief illness. He is survived by his wife and son P R Venkatarama Rajha, the vice-chairman and managing director of the group, according to the Press Trust of India. Ramasubrahaneya Rajha was the son of the group’s founder P A C Ramasamy Rajah.

India: Neeraj Akhoury has been appointed managing director and chief executive officer (CEO) of ACC with effect from 4 February 2017. He joined the board of ACC in December 2016.

Akhoury has worked in the cement and steel industries for the last 24 years. Previously he was the CEO of Lafarge Surma Cement and the country representative for LafargeHolcim Bangladesh. He began his career with Tata Steel in 1993 and joined the LafargeHolcim Group in India in 1999. He was a member of the Executive Committee of Lafarge India, heading Corporate Affairs followed by Sales. In 2011, he moved to Nigeria as CEO and Managing Director of Lafarge AshakaCem. Subsequently he was appointed Strategy and Business Development Director for Middle East and Africa at the Lafarge headquarters in Paris, France.

A few days ago my family faced a financial crisis caused by demonetisation. The family piggy bank holds a number of one-pound sterling coins. However, the Bank of England is set to introduce a new 12-sided one-pound coin in March 2017 and withdraw the old type circular coin by the end of October 2017. Unfortunately the piggy bank in question is of the variety that can only be opened by smashing it. There followed various attempts to extract the coins via the narrow opening.

Now just imagine if a country of over 1.25bn inhabitants and a gross domestic product of US$8.7tr faced a similar problem. Well, you don’t have to imagine it because India’s demonetisation plan to remove 500 and 1000 rupee banknotes from circulation started in November 2016. Some commentators reckoned that the banknotes represented nearly 85% of its currency by value. Indian citizens then had until the end of December 2016 to take the old bank notes to a bank to have them exchanged. The government has said that the plan was conceived to cut corruption, increase tax revenue and reduce cash hoarding. However, critics have attacked the policy for unduly penalising the poorest members of society as they struggle to move from using cash to electronic methods.

That’s the background. Global Cement is interested in cement markets. Although its early days yet some reactions and data are starting to emerge. Ambuja Cement launched a marketing campaign in December 2016 to help its customers cope with a cashless business environment. The initiative has included working with a bank to operate a helpline assisting people in opening bank accounts as well as putting out the message in various media including sending one million text messages. Clearly, at least one of India’s major cement producers is taking the problems caused by demonetisation seriously.

Alongside this, various reports have trickled out since November 2016 trying to work out the effects of the financial transition on the cement industry. Firstly, the India Cements reported in mid-November 2016 in a financial report that demonetisation had not impacted its cement sales. Deutsche Bank Markets Research then predicted that the policy would reduce cement demand by up to 20% for the last few months of 2016 and then reduce growth by 3% in the first three months of 2017. Its analysts reckoned that the residential sector would suffer the most and that although infrastructure spending might offset this a little, reduced taxation from a punctured property market would also adversely affect infrastructure funding. A report in the Hindu newspaper in early December 2016 feared that cement demand might be reduced by up to 50% in November 2016. It also raised the concerns of the managing director of Shiva Cement who said that contractors were finding it difficult to buy raw materials and pay wages.

Now in early January 2017 the India Ratings and Research credit ratings agency released a research note predicting that cement production growth was likely to fall to 4% for the 2017 financial year ending on 31 March 2017 from a previous estimate of 6%. It reported that production growth rose by only 0.5% year-on-year in November 2016 following a growth rate of 4.3% from April to November 2016 and rates of 5.5% and 6.2% in September and November 2016 respectively. It added that the housing sector constitutes around 65% of cement demand and that this share is likely to fall.

After a strong start to the year the Indian cement industry was looking forward to a growth rate above 5% in its 2016 - 2017 financial year. The figures aren’t out yet and the year isn’t finished but it is looking likely that demonetisation, a direct government policy, has smashed demand for cement in India in the short term.

Global Cement would be interested to hear from any readers in India for their comments on demonetisation and its effect on the cement industry – This email address is being protected from spambots. You need JavaScript enabled to view it.