India’s cement industry is increasingly becoming a battleground for firms with deep pockets. The Adani Group’s recent acquisition spree, including its purchase of Sanghi Cements for Rs 5,000 crore, has intensified competition, particularly in Western India.
Other players like Ultratech Cement on the other hand, are adopting a more traditional approach by expanding their capacities. Despite a boost in infrastructure spending from the government,a pricing war is eroding the profitability of cement manufacturers. After a big drop in fuel and freight costs in Q4FY23, variable costs are showing signs of an increase, adding pressure to margins.
The pre-election infra push is leading the cement industry’s growth in FY24. The industry typically witnesses a demand slowdown post-election.
Adani, Dalmia and Ultratech shift strategies in attempt to dominate
The Adani Group (ACC and Ambuja) is racing towards market leadership by acquiring strategic cement players. Its recent purchase of Sanghi Industries (SIL), a port-based manufacturing plant, is another important link. Leveraging its expertise in port logistics, the Adani Group can move the supply to the western coastal region (as far as Kerala and Tamil Nadu) in case of demand.
Dalmia Bharat acquired Jaiprakash Associates (JPA) Cements for Rs 5,666 crore at the start of 2023. While Ultratech is keen on acquiring JPA’s Uttar Pradesh plant, the deal has hit a roadblock and remains in arbitration. Ultratech Cements, which has traditionally grown through acquisitions (Century Cements, Binani Cements, Jaypee Cements), is now opting for organic growth instead of acquisition.
Ultratech’s pivot is due to increased bidding competition in asset sales. Smaller sellers, aware of favourable market conditions, are not willing to lose a good thing by selling while the cement industry is seeing volume demand. Adani's entry into the sector has also turned up the heat, pressuring smaller players as the pricing war escalates. This is a common strategy for a large player across sectors: offer heavy price cuts to drive smaller competitors out of the market. In an entirely different market - electric cars - Elon Musk has made deep price cuts to Teslas, in the hope of forcing electric car startups to exit.
Given the growing competition and additional capacities coming on stream in the cement sector, smaller manufacturers are likely to be forced to sell to large players in the coming years.
The price war continues
India's cement industry is highly sensitive to price shifts, often experiencing volume drops with even minor price increases. After a staggering drop from a high of Rs 370 per bag in April 2022, cement prices seem to have stabilized around the Rs 340 range in August 2023. The price drop in Q4FY23 can also be attributed to the pass-on effect of lower raw material costs. However, minor price increases have not been sustained over the past 10 months.
All-India cement prices have declined in the past quarter
Industry players are now prioritising volume growth over pricing discipline, a shift driven by the risks of volume shortfalls and a loss of market share. The intense competition to gain market share is softening prices. It's common for cement players to announce price hikes at the beginning of each quarter, only to later retract them through discounts to maintain volumes. Given the seasonal demand slumps in Q2 and Q3 due to monsoons, a potential price increase is expected in the second half of FY24. However, overall pricing will still be 3-5% lower than that of FY23.
Realisation per tonne declines due to intense competition
The ongoing price war has led to lower realisations for the industry. On average, there has been a decrease of Rs 50 per tonne in price realisation QoQ. Orient Cement is the only exception, with a 1.8% QoQ increase in price realisation.
Average realisation per tonne for cement manufacturers drops by Rs 50
Larger players are navigating the problem with volume increases, while smaller players face the heat.
Fuel and power costs to rise in Q2FY24
Fuel and power costs, which account for nearly 50% of manufacturing expenses, are showing signs of an increase. After plummeting by almost 40% from their Q3FY23 highs, the prices of coal and pet coke (key components of these costs) have risen by 16-20% in the past couple of months.
Fuel costs on the rise since July 2023
This price hike is expected to squeeze the margins of cement manufacturers in the next couple of quarters. The sector’s inability to raise prices in line with climbing manufacturing costs will affect profitability.
However, there's a silver lining: coal and pet coke prices are expected to remain range-bound in H2FY24 due to an anticipated decline in consumption, owing to lower imports from European nations. The warmer-than-usual winter and higher inventory in European nations have slowed down consumption.
Growing awareness of green energy solutions is also limiting coal usage in the longer term. For instance, Ultratech Cement aims to meet 30% of its fuel demand through renewable energy, while Ambuja Cements plans to manufacture nearly 21% of its cement using green energy in the coming years.
Freight costs inch up despite flat diesel rates
Despite fluctuating crude prices, diesel prices have stayed the same for five quarters due to government intervention. This stability has provided visibility in freight costs for cement manufacturers. Even with crude prices going over $90 per barrel, diesel prices are expected to remain stable, if not decrease, until the May 2024 elections.
Diesel prices hold steady despite increase in crude oil prices
Fuel prices and freight costs have a strong correlation, and freight costs are increasing for cement manufacturers. One of the reasons for the increase is the rise in transportation charges in Southern India. Cement makers in Tamil Nadu and Kerala are running at full capacity and have started importing cement from Andhra Pradesh, which has raised costs.
Average freight cost for cement manufacturers rises by Rs 12 per tonne in Q1FY24
Election spending to drive cement volumes
Cement manufacturers saw a volume growth of around 8-10% in Q1FY24, which is expected to rise after the monsoon season. The government has allotted Rs 10 lakh crore for infrastructure projects in the FY24 budget, a significant increase of 33% from FY23. With four big states (Telangana, Chhattisgarh, Madhya Pradesh and Rajasthan) going for elections in FY24, the infra push is going to see another boost. Cement manufacturers are expecting heightened demand in the run-up to the polls, with volumes expected to grow in the range of 10-12% in FY24.
While the price war by larger players is affecting the profitability of smaller manufacturers, the increase in volume provides a cushion against price compression. Post-elections, as additional capacity becomes operational and demand dries up, the industry is likely to see more consolidation and slowing profitability