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Cement Mini Plants Economically Unviable

Woes of the cement industry in India continue. Mini cement plants are the latest victims.. Read how..

Plants with capacity of less than two million tonnes are classified as mini cement plants.

I have mentioned in my articles on the Indian cement sector in the past, that the cement industry is facing severe cost pressures. Prices of raw materials — such as coal, limestone, and freight costs — have risen by nearly 30-40% over the past two years.

Cement consumption by the user industries has been growing at a far slower pace than capacity addition in the sector. This has kept cement price rise under check. Cement is a seasonal industry and its demand is weak during the monsoon months.

High costs, together with slower demand and weak prices, have dented profits of the cement industry. At one time, nearly 2-3 years ago, cement was one of the highly profitable (in terms of operating and net profit margin) industries in India. However, net profit margin has dipped to nearly 7.4% (net of non-recurring transactions) in financial year 2010-11 from 9.2% a year earlier.

The Indian cement industry, struggling with oversupply, saw capacity utilisation fall to a 13-year low of 83.9% for 2010-11, according to Cement Manufacturers Association. In the past five years, capacity utilisation of the industry stood close to 95%.

During June 2011, demand remained subdued due to the onset of monsoon, slower construction activity and lower consumption by real estate sector.

Average prices across India witnessed a correction during June 2011. Region-wise price movement is as under:

  • Manufacturers in the south, have tried to maintain a cap on output over the past several months resulting in firm prices
  • Northern region registered a fall in prices as demand continued to be low
  • Prices eroded in the east due to rainfall
  • Onset of monsoon and higher supply pushed down prices in the western parts

Cement Despatches for Jun 2011 (million tonnes)

  Jun‐11 May‐11 Jun‐10 Y-o-Y % Change M-o-M % Change Apr-Jun 2011 Apr-Jun 2010 % Change
Cement majors 9.71 9.86 9.38 3.60 -1.50 29.60 28.87 2.50
ACC 1 .91 1.99 1 .78 7.30 -4.00 5.95 5 .32 11.80
Ambuja Cements 1 .70 1.76 1 .72 -1.20 -3.60 5.33 5 .52 -3.40
UltraTech 3.22 3.24 3.00 2.00 -0.70 9.66 9 .89 -2.30
Shree Cement 0.84 0.79 0 .79 6.60 7.10 2.42 2 .39 1.30
Dalmia Cement 0.41 0.43 0 .34 21.10 -2.60 1.23 1 .03 19.30
OCL 0.25 0.28 0 .26 -3.40 -10.60 0.83 0 .81 2.20
Jaiprakash Associates 1 .37 1.37 1 .33 3.50 0.40 4.18 3 .91 7.00
Source: Company, Edelweiss research

This scenario of contracting profits reduced the price advantage between mini cement plants and the large plants with deeper pockets, thereby making it unviable for the smaller plants to survive. Hence, 80 units with an average capacity to manufacture 100 tonnes of cement have shut shop.

Given the rising supply and slower growth in demand for cement, we believe that these 80 mini cement plants — accounting for only 7% of Gujarat’s 13 million tonne capacity — are unlikely to affect either supply or prices in the region.

Also, it is estimated that the cement companies would record a weak profit performance during the June 2011 quarter. While revenues are likely to have grown, a sharp rise in costs is expected to dent profitability.

Categories: Cement
  1. deepak gupta
    July 11, 2012 at 2:06 pm

    this artical is very useful for me. can you please tell me something more about this industry?

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