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This content is for the sole use of S Shahzad Anjum working for Indian Institute Of Management.

Demand dynamics closely related to

construction sector
Demand for cement is closely related to growth in the construction sector. Over the past 5 years, from
2008-09 to 2013-14, demand for cement has grown at a moderate CAGR of around 5 per cent, largely
led by construction of infrastructure and industrial projects, coupled with modest demand from the
housing sector and commercial construction.

Demand drivers
Demand for cement stems either from new construction work or repair of existing structures. Further,
demand can be classified into four segments, namely housing (55-60 per cent), infrastructure (20-25
per cent), commercial construction (5-10 per cent) and industrial segments (10-15 per cent).
Segments influencing cement demand

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Source : CRISIL Research

Housing: Main driver of demand for cement

The housing sector acts as the major demand driver for the cement industry in India, accounting for
around two-third of the overall cement demand. The demand from the housing sector is influenced by
three factors viz - per capita income of the rural and urban consumers, government outlay and access
to finance. Before the economic slowdown of 2009-10, the urban housing market witnessed a
boom on the back of increase in income levels, employment opportunities created by the information
technology (IT) sector and the growing number of nuclear families. Urban housing demand grew at a
mere 1 per cent CAGR during the last 5 years, mainly influenced by the slowdown in the last 12 years.
Similarly, demand for rural housing has witnessed a slowdown in the past 1-2 years. Demand from
rural housing in the last 5 years was driven by government-supported schemes and increase in rural
income. Robust rural wage growth drives construction of larger and more pucca houses. In future,
demand for pucca houses is expected to grow at a healthy pace as the penetration of pucca houses in
rural India remains low at around 50-55 per cent as of 2012.

Infrastructure: Increasing government thrust on infrastructure

Over the past 5 years, the infrastructure segment accounted for nearly one-fifth of the total cement
demand in India. Demand from the segment grew at a CAGR of 6 per cent during this period. Over
the next few years, increasing spend on urban infrastructure projects and irrigation are likely to act as
major drivers for cement demand from the infrastructure segment. Besides, continuing investments in
the power sector as well as increased cement intensity in road projects are expected to propel cement
demand further.
Infrastructure spending in India

Source: CRISIL Research

Commercial construction - Development of office space to drive growth

The commercial construction sector segment can be classified into office space, malls and
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multiplexes, hotels and other civil structures such as hospitals and educational institutes. Of these,
demand from office space accounts for a considerable portion of the overall commercial construction
demand. Over the medium term, demand for cement from the commercial construction segment is
expected to be muted on the back of significant construction in the past and weak demand for
office and retail spaces owing to the slow economic growth.

End-users
The main buyers of cement are government, institutional buyers and retail buyers. Government and
institutional sales are usually in bulk and cost lower than retail purchases.
Government
The government obtains cement at very competitive prices due to its purchase process. It buys cement
through two routes: direct tenders, or through the Director General of Supplies and Disposals
(DGS&D). The DGS&D receives cement rates from various cement companies, selects the vendor,
and distributes it among government agencies registered with the DGS&D. The government gets a
significant portion of its total requirement through the direct tendering process, and the
remainder through the DGS&D.
Institutional buyers
Institutional buyers (other than the government) such as contractors and developers buy cement from
either cement companies or wholesalers. The developers, contractors themselves decide on the variety
and brand of cement to be purchased.
Retail buyers
Demand from retail buyers includes individuals procuring cement for the housing segment. As they
have low requirements, they buy from retailers. Consequently, retail buyers have lesser pricing
flexibility than institutional buyers, who make bulk purchases. In case of retail buyers, the mason
typically decides the variety and brand of cement to be purchased.

Seasonality of demand and cyclicality of the industry

Demand declines during monsoons due to slowdown in construction activity, consequently making
demand for cement seasonal. Monsoons typically extend from June to September across India (except
in parts of Tamil Nadu and Kerala, where they last from November to January). Consequently,
demand is the lowest during the July-September quarter and highest during the January-March
quarter.
In addition, the cement industry, like most capital-intensive commodity industries, is cyclical in
nature, especially with respect to supply. Given the high gestation period of 24-30 months, there is a
time lag between the capacity build-up and cement demand (approximately 24-30 months). Demand
for cement is linked to economic growth. Hence, when the economy is strong, demand increases. As a
result, the profitability of players increases, leading to capacity additions by existing players and the
entry of new players. However, since it takes around 2-3 years to build a cement plant, it is likely that
demand could either decrease or stagnate, or capacity additions could exceed demand before
completion of these capacities. This could lead to decrease in cement prices with the industry facing a
downturn, and players reducing operating rates or shutting their plants.

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Supply
Demand growth and level of consolidation in the region influences supply in the cement
industry. Capacity utilisation of cement depends on the demand for cement in the market. We estimate
capacity utilisation of the cement industry at around 69 per cent in 2013-14. Since cement is highly
freight-intensive in nature, the industry faces serious transportation constraints in terms of timely
availability of rail wagons. This has forced manufacturers to move progressively larger quantities by
road.
Cement supply

Source : CRISIL Research

Cement industry - Regional in nature

Cement is a high-volume and low-value commodity. Transporting cement beyond a distance makes it
unviable for end-users, thus making the cement industry largely regional in nature. Cement
consumption varies region-wise because the demand-supply balance, per capita income and level of
industrial development differ in each state and consequently, in each region.
In 2013-14, the South accounted for the largest share of consumption (around 25 per cent), followed
by the West (around 21 per cent), North (around 19 per cent), East (around 18 per cent) and the
central region (around 17 per cent).
Region-wise cement consumption

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Source: CRISIL Research

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