Economist and business strategist, Michael Porter, recently described the current growth in India as meaningful and significant, but not perfect: “The business environment is better, but it is not good. Infrastructure is better, but it is not good.”
Fourteen years ago, one of the biggest challenges talked about in India was electricity. Many improvements have been made since then fuelling growth and opportunities in the economy, which is expanding rapidly with an already large, diverse and growing population.
But even with the numerous improvements to date, many more are still required in this evolving environment, which is characterised by increasing demand for real estate and continued infrastructure investment. These positive trends are ensuring India remains the world’s second-largest national cement market and a somewhat optimistic corner of the industry to watch.
With India’s GDP trebling between 2000 and 2016, the rate of growth has in part been driven by the continued population growth, but is also a result of several Indian government reforms including rural development, coal mining, tax reforms and ease of doing business. The introduction of a nationwide goods and services tax designed to simplify the tax system and encourage interstate business is a hopeful sign of an increasingly strengthening economy to fuel future developments.
In recent years, demand for cement in India has grown at around four percent annually. But that rate might increase even more. A nine percent compound annual growth rate in property volume could now drive the demand up even further to six percent.
In recent years, demand for cement in India has grown at around four percent annually. But that rate might increase even more. A nine percent compound annual growth rate in property volume could now drive the demand up even further. Global financing institution Morgan Stanley expects annual growth to accelerate to 5.5-6 percent.
India’s growing population and the need for housing has been impacting cement demand for some time. It is estimated that around 65 percent of cement production is driven by the housing sector, amongst the highest in the world. The trend is likely to continue, with the World Economic Forum predicting India will become the most populous country in the world in, or around, the year 2027.
The consumer trends of the population are also changing. Consumption now accounts for a larger share of India’s economy with the young work force also reaching ‘home buying’ age, as described by Alex Frew McMillan, Forbes magazine: “The fast-growing population has very little household debt, and the finance industry has been maturing in a way that will suit their borrowing needs. Top that with repeated interest-rate cuts by the central bank, and you have almost perfect conditions for property purchases.”
It is thought that annual property market sales will increase to $462 billion in 2025 (they were $105 billion in 2015) with over 600 million people living rurally in India, according to Morgan Stanley. This will ensure that rural development remains a priority of the current government with healthcare, employment opportunities and quality housing also being top priorities. Several rural housing schemes have also been rolled out that are directly impacting cement consumption. These include plans by the government to build 20 million housing units over the next five years.
With its increasing per-capita income, the Indian market is also being noticed by private investors, who have started returning to a perhaps underrated market, breathing new energy and driving new developments in the region.
Competition heats up
In 2016, India’s cement consumption reached a record high of 287.84 million tonnes. However, utilisation rates are down since consumption has failed to keep up with capacity. But many see this as a short-to-medium-term issue that will right itself as investment in new capacity, which has been low in recent years, and consumption continue to increase.
In the meantime, the low utilisation is creating even greater competition and many cement producers are turning their attention towards maximising productivity and production efficiencies. Investments in technology, as well as the knowledge of how best to apply the technology, have been key to ensuring these cement producers are achieving the lowest energy consumption and emission rates per tonne of clinker.
“We’re seeing an increasing number of producers focussing on improving their efficiency and mitigating against equipment failure,” according to Carsten Riisberg Lund, Country Head and CEO of FLSmidth India, emphasising that even for producers already well-equipped with relatively new lines, productivity enhancement is top of the agenda. He points to cement producers such as India Cements, which recently ordered a state-of-the-art FLSmidth Vertical Roller Mill to improve grinding unit productivity, and Rain Cement, which successfully retrofitted a cooler.
Opportunities in neighbouring Bangladesh and Nepal are also continuing to emerge. In Nepal in particular, greater financial and political stability as well as rebuilding projects following the 2015 earthquake are proving to be significant growth factors.
“Projects in infrastructure have helped create optimism within the Nepalese cement industry,” explains Carsten Riisberg Lund. “Specifically, we’ve seen a large effort in internal development, hydropower and the modernisation of the road network, which in turn makes cement producers focus on new clinker production lines and new grinding units with the goal of self-sufficiency.”
Greater interest in capacity expansion can also be seen in Bangladesh, which is already the world’s 20th largest cement consumer and the leading importer of cement and clinker, according to ICR research. As an example of the eagerness to invest, the world’s biggest vertical roller mill was ordered from FLSmidth by Shah Cement Industries Ltd in 2016.
With an expanding economy, more government investments in infrastructure, and a plentiful supply of raw materials, Indian cement producers have grounds for careful optimism. Many are well-placed to cope with the increased competition and meet the challenges ahead. While maximising growth and performance opportunities, they can help build optimism by shaping future developments through best practice initiatives. These include formalising corporate social responsibility programmes, which have nevertheless always been core to the Indian cement industry.
Even with a few head winds in recent times, it’s certainly an exciting environment to be part of as urbanisation continues to change the face of society – and is likely to for years to come,