Industry Primer: Cement Sector

There are two general processes that are followed for producing cement in India – the dry process and the wet process. Almost 95 per cent of the cement is produced through the dry process, as it consumes less energy than the wet process.

1) The first step for making cement is to procure limestone from the mines, which are quite abundant in India. Approximately 1400 kg of limestone is required to make one tonne of cement, though the requirement may be reduced when blended cement is being manufactured. Limestone is big in size, and hence, needs to be crushed into manageable chunks of 20 mm.

2) Grinding - The processed limestone is then ground in the grinding machine. A vertical steel mill with huge rollers is used to grind the material. In this process, limestone (95 per cent) is mixed with other additives (secondary raw materials) like clay, bauxite, silicon aluminum and iron ore. These are crushed and milled into a raw meal. The secondary raw materials (materials in the raw mix other than limestone) used depend on the purity of the limestone.

3) Pre-Heating Process - The raw meal, which is ground, is then put into a six to seven stage pre-heater. Here, it meets
the hot gases rising from the kiln. The raw meal in the pre-heater is heated at temperatures between 600-800 degree
celsius. This process is to remove the Carbon Dioxide from the raw meal to form Calcium Oxide, also known as quick
lime. It also helps the company to save energy to be used in the clinkerisation (calcination) process.

4) Clinkerisation (Calcination)- Making Of Clinker - This is the most critical stage for any cement manufacturing process. Once the raw meal is pre-heated, the resultant Calcium Oxide, i.e. quicklime, is then fed into the kiln, which is a huge rotating furnace. This is further heated at 1450 degree celsius with the help of coal/pet coke or oil. 100-120 units of
electricity are required to produce one tonne of cement.

Power & fuel is one of the major cost components for a cement company, accounting for 15-20 per cent of the total cost of production. This is one of the reasons why many cement producers go for captive power plants when they set up cement plants, in a bid to keep their manufacturing cost under control.

5) Cement - The clinker is almost the final product. However, to bring more strength to ordinary portland cement, the clinker is mixed with other components like gypsum, fly ash etc. to finally get cement. Gypsum is used to keep the stickiness of the cement intact, and tends to set instantaneously when used with water. Gypsum is added to the extent of five per cent during the cement making stage. The mineral is naturally available in abundance in Rajasthan, Gujarat and Tamil Nadu. The other raw material that is used is the blast furnace slag (waste coming from iron smelting furnace) mostly used to produce portland blast furnace slag cement.

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There are many types of cement that can be produced by using a mixture of various other substances. However, we have tried to give only the major types of cement which are used extensively.

Major Cement Producing Companies In India

The industry saw some amount of consolidation in 2008. Following this, approximately 45-50 per cent of the market is now controlled by five major players, i.e. UltraTech Cement, ACC, Ambuja Cements, Jaiprakash Associates and Shree Cement. Note that ACC and Ambuja Cements are controlled by same management, viz. Holcim.

Cost Of Setting Up A Cement Plant

The cost of setting up a cement plant is measured on a per tonne basis. The current replacement cost for setting up a new cement plant is around Rs 6000-6250 per tonne. ACC has recently announced that it would set up a 5 Million Tonne cement plant at a cost of Rs 3300 crore, which works out to be Rs 6600 on a per tonne basis. If companies opt for a brownfield expansion, the cost would be around Rs 3750-4250 per tonne. In fact, one of the ways to assess the valuations of cement companies could also be on a EV per tonne basis, which gives some idea about whether the companies are trading at, above or below their fair valuations.

Major Costs Attached With A Plant

Cement is an energy-intensive industry. Nearly 100-110 kWh of power is required for producing one tonne of cement. Thermal coal is one major source of heat used during the process of clinkerisation. Coal is also used for its silica content, which acts as a constituent in clinker. This constitutes 15-20 per cent of the total cost of sales.

The cement industry accounts for four to five per cent of India’s coal demand. In the last one year, coal prices have gone up due to supply shortages and higher consumption by the domestic power companies. Many of the large cement plants in the country have now installed captive power plants to ensure reliability of supply and to insulate themselves from the rising power tariffs.

The other major cost for a cement company is the freight cost, which accounts for 15-20 per cent of the total. Cement companies rely extensively on transportation for moving coal from the coal pitheads to the cement plants and for dispatching cement from the plant to the market.

Thus, power & fuel cost and freight cost are the two major cost components for cement companies, accounting for almost 50-60 per cent of the total cost of production (the rest being in the form of packaging, stores, spares overheads, etc.). One needs to observe these expenses to understand the margins of cement companies.[PAGE BREAK]

Current Status Of The Cement Sector

India is the second largest cement producer in the world after China, with a total production capacity of 310 million tonnes per annum (MTPA) in 2011. The country has nearly 365 mini cement plants and 130 large cement plants. The large cement plants account for almost 95 per cent of India’s cement production. In the last five years, the capacity and demand has grown at 14 per cent and seven per cent respectively on a compounded annual basis. This is mainly on account of faster capacity additions and lower growth in demand seen over the last two years.

The major growth driver for the sector is the higher infrastructure and construction spending by the government and by the retail segment. In the last two years, however, the retail construction and housing sectors remained subdued due to a tighter liquidity situation and lower spending, which resulted in fewer new houses being constructed. Faster capacity expansions and high input costs also added to the worries of the Indian cement companies, which struggled to keep their heads above the water in terms of margins and sales volumes.

India is one of the lowest consumers of cement in the world, with the per capita cement consumption at 150 kg as compared to the average of 355 kg in the other parts of the world. It is also lower than the cement consumption of other developing countries like Brazil (191 kg) and Thailand (366 kg).

Higher capacity additions and lower demand has forced cement companies to operate at lower capacity utilisation, especially in the southern region, which was a major victim of the subdued demand and surplus capacity situation. However, the cement companies have done in H2FY12, well mainly on account of the improved demand scenario and a rise in cement prices through production cuts. As per the dispatch numbers released by the Cement Manufacturers Association (CMA), the December 2011 quarter has witnessed the highest growth in the last nine months. The dispatch during Q3 FY12 has grown by 10.2 per cent on a YoY basis to 44.22 MT, taking the nine month growth to 5.13 per cent on a YoY basis. Moreover, cement companies have increased the product prices twice in the last two months, which will result in better realisations in the March 2012 quarter. However, the hike in the freight rates by 20 per cent will eat away some of the benefits coming from the price hike.