2.1 – Cement – An Introduction

We laid down a basic foundation for sector analysis in the previous chapter. In this chapter, we will discuss the Cement industry. I have picked cement as the first sector because cement is an inherent part of modern civilization. The concrete jungle, as we call our cities, is made of cement.

India is the world’s second-largest cement producer, with a 7% global market share. Surprisingly, the largest producer, China, accounts for over half of the total global cement production. China produced 2.1 billion tonnes in 2022, while India produced ~370 million tonnes

The vast difference between China’s and India’s share in cement production perhaps shows the long runway ahead that India’s infrastructure has to cover and the opportunity for the cement sector. India has an installed capacity of over 570 million tonnes per annum (mtpa). Another ~150 mtpa in capacity is expected to be added by 2027.

Owing to the housing and infrastructure boom in Eastern India, the region is expected to get a third of the total capacity additions. It also accounts for 80% of houses constructed under the PMAY-G scheme. Pradhan Mantri Awas Yojana (Gramin), or PMAY-G, is the central government’s scheme to subsidize the construction of pucca houses with basic amenities in villages.

Generally speaking, there are two types of cement – Portland Cement and Non-Portland Cement. All cement we generally see being used around is Portland Cement and its various blended forms. Non-Portland cement is not commonly used due to its corrosive nature. Although a value-added product in itself, cement is essentially a commodity. Its all-pervasive use has made the cement an industry of its own, and its peculiarities warrant an analysis unique to the sector.

2.2 – How is cement manufactured?

Let us have a glimpse of the Portland cement manufacturing process to identify the various sources or steps that could impact the cost of production, its selling price, and profitability. 

    • The first step is mining limestone from quarries, the key ingredient in cement production. Most cement makers own limestone quarries.
    • Limestone and clay are mixed in an 80:20 ratio and ground into fine powder. Limestone content could be lesser, depending on the desired cement properties.
    • This fine powder is mixed with water in a 65:35 ratio to form a slurry
    • The resultant slurry is fed into a kiln to be heated at 1400-1500 degree Celsius to make clinker
    • Clinker comes out of the kiln in the form of grey balls
    • The clinker is then cooled. About 3-4% content gypsum is added to it. It is blended with fly ash, GGBS, or other such materials depending on the type of cement required. (Fly ash is a waste residue from thermal power plants, and GGBS or Ground Granulated Blast Furnace Slag is waste residue from iron production.) Most cement sold in India is in blended variants.
    • The mixture is ground into fine powder. This powder is cement.

You can also understand cement production in this video by Vox. It is interesting for two reasons: One, it graphically explains the cement manufacturing process, and two, it discusses the possible solutions to the environmental concerns around cement manufacturing. But more on the environmental concerns later.

As you can see, the process of manufacturing cement remains the same across companies. As an investor in the sector, you should analyze which steps in the manufacturing process consume more cash and where a company can save costs. Also, remember, although belonging to the same sector, no two companies are the same. You need to analyze if a factor impacts the whole sector or is specific to a company. In fact, this is the end objective of a typical sector analysis, i.e. to understand a sector and its nuances and eventually zero in on companies that thrive within the sector so that you can make wise investment decisions. It may sound complex at this stage, but eventually, you will realize this is a common sense approach without rocket science.

2.3 – The Three Major Cost Centres

  1. Input Cost

This is basically the Cost of Goods Sold, a concept we learned in the Fundamental Analysis module.

Limestone is the most important ingredient in cement. Cement companies own limestone quarries to control costs. They mine limestone from their quarries and process it to make clinker at plants that are generally set up close to the quarries.

Water is another major input in the process. Consistent water supply is also a major challenge in many parts of our country. Therefore, many cement companies have water recycling, rainwater harvesting, and groundwater recharging systems in place. This ensures regular water availability and better visibility of costs.

  1. Power and Fuel Cost

Most cement manufacturers maintain captive power plants to bring down fuel costs. Let me introduce the concept of captive plants or units. If a manufacturing company can produce power for its own use, it is said to have a captive power plant. 

Another example would be a pizza chain owning a small tomato farm to produce fresh organic tomatoes for its pizzas. In this case, the tomato farm is called a captive farm. A captive unit’s product is not sold but used in-house for producing another product. 

Larger players like Ultratech Cement, Ambuja Cement, and ACC have captive thermal, wind, and solar power plants. Despite captive power plants, fuel costs for these major players can be as high as 25% of the revenues. Some cement makers even own coal mines to insulate from the impact of coal price fluctuations. Ultratech and Ambuja both have captive coal mines to support their requirements partially. 

Sourcing coal can often be a challenge. For instance, whenever there is a coal shortage, the government could ask domestic coal producers to sell coal only to power generation companies. Cement producers that own coal mines or other forms of captive power plants are at an advantage here. Others will have to import coal from international markets. Steel and aluminium industries are also heavy coal users and compete with cement in the international market to import coal, pushing prices up.

This is not to say that coal mine owners are always better off. During a down cycle when the demand for cement is low, owned coal mines are a fixed cost that the manufacturer must bear amid slow production and sales. Or if there came a time when coal prices were abysmally low, buying coal from the market would become cheaper than mining at owned quarries. 

Given that coal is a dirty fuel, the possibility of a regulatory ban on its industrial use will only increase. Owned mines would become a dead cost if that were to happen.

Controlling wastage and climate change

All cement producers have waste heat recovery system (WHRS) plants in place. WHRS is good for two reasons – fuel cost savings and reducing carbon footprint. The tremendous heat generated in clinker production is channelled to generate steam. This steam is passed through turbines to generate electricity. This electricity can cater to 25-30% of the cement plant’s power requirements.

The increasing focus on reducing fuel costs and carbon footprint has given rise to an interesting metric known as the Clinker factor. It represents the proportion of clinker in a cement recipe. The lower the clinker factor, the better. This may seem paradoxical – how can having less of the primary component be better? It is because clinker is also the most fuel-consuming step in the process of cement production. 

But wouldn’t that hurt the quality of cement? Manufacturers have been innovating recipes that augment the features of cement while retaining its strength. Fly ash, gypsum, silica fume, volcano ash, and other industrial by-products are common ingredients of blended cement. The Vox video after the manufacturing process above explains this well.

  1. Freight Costs

Cement is a perishable product. It typically has a shelf-life of just 90 days. Therefore, the distribution of cement has to be fast and efficient. It is also perhaps why cement producers own the entire value chain beginning with limestone quarries. It enables them to be in control of the inventory and costs.

Since perishability is a concern, cement companies might also own warehouses and trucks to monitor costs, time, and wastage.

Another industry hack is to have grinding facilities closer to the market. According to Ultratech Cement’s Annual Report for 2021-22, it has 23 integrated plants, 27 grinding plants, and over 175 Ready-mix Concrete Plants.

Let me break this down. An integrated plant crushes limestone, makes clinker, and grinds it into cement. Such plants are mostly close to the raw material source – the limestone quarries, in cement’s case.

To solve the perishability problem, grinding units are set up closer to the market. The grinding unit will cater to a market which is more likely a state or comparable region. These facilities receive clinkers from the clinker plants that are set up near the quarries. Other components to be blended into the cement are procured directly at this grinding facility. The clinker with other components is ground to make the final cement. The grinding unit’s proximity to the market means a shorter time spent transporting the cement to the market.

Further closer to the market are RMC plants. RMC, or ready-mix concrete, is a mixture of cement, sand, gravel, water, and other ingredients that make a paste used to bond the bricks in a wall. RMC has a very short shelf-life of a few hours. Therefore, RMC plants are smaller than grinding units and cater to small clusters of markets or just cities.

Not all cement is sold in the form of RMC, but it is growing in popularity. As a business, cement companies would love to sell RMC; it is a value-added product and hence can improve margins. But it also adds capital expenditure. For construction companies, RMC is convenient because of the limited spaces available in cities and because it is one less job to do.

2.4 – Distribution of Cement

Distribution of cement, or bringing it to the market, requires its own study. Cement is a “low value, high volume” product. As of this writing in May 2023, a 50 kg bag of cement costs roughly ₹400. Compare that with a bag of grains or cloth or cosmetics or gold. Transporting a unit of any of these items from one point to another will surely bring higher revenues than transporting the same unit of cement. Perishability, as discussed earlier, is a challenge too. An efficient distribution system is key to maintaining profitability in the cement business.

At a time when urbanization has picked up pace, cement has become a necessity. If the market had only a small number of manufacturers, they could dictate prices, effectively impacting infrastructure growth and real estate prices. But the industry has several large players; over 25 are listed. However, the top five players account for almost half the national capacity. Huge capacity additions have been driving competition. Competition is also pushing the players to innovate and develop more ways of cutting costs and improving margins. Some are spending on branding and marketing to boost sales.

2.5 – Demand Drivers for Cement

The next step is to understand the uses or users of cement. In other words, let us understand what drives the demand for cement.

Cement is used in building houses, roads, dams, and other infrastructure. The cement users could be classified into three broad categories – housing, infrastructure, and industrial.

    • Keeping aside unconventional building techniques, every residential building uses cement. Therefore, growth in the real estate sector is usually perceived as a positive sign for the cement sector. When tracking the growth of the cement sector, be careful not to mistake growth in house registrations as growth in the real estate sector. Resale is a big part of registrations. There is also a strong likelihood of urban housing behaving differently than rural housing.
    • Infrastructure encompasses roads, bridges, railways, airports, dams, and irrigation facilities, among other public facilities, mostly built by the government. The more the government spends on infrastructure, the higher the demand for cement from this sector.
    • The industrial application of cement is in building factories, processing plants, kilns, and other industrial structures. Large corporations generally do these kinds of capital expenditures. Corporations spend when they see potential demand for their products and have the ability to make such expenditures. One must, therefore, check if the demand is growing and if corporations are willing to cater to that demand. 

Seasonality also impacts the demand for cement. All forms of construction activities usually slow down during the monsoon season, thereby impacting the demand for cement.

Studying manufactured bulk commodities like cement requires a deeper focus on the entire value chain, from production to distribution and sales. The asset-heavy nature of the value chain also makes cement manufacturers prone to take on more debt. An investor studying the sector must also look at the debt levels of the companies and the sector at large. A structure to the above discussions to simplify studying the sector could be very useful. Let me suggest a checklist that you could use when studying the cement industry.

2.6 – The Checklist

You can find these metrics in cement companies’ quarterly presentations and annual reports.

Now why do metrics matter? These metrics are specific to the cement sector. If you are interested in investing in cement, combining these metrics with the regular company-based fundamental analysis can ensure complete sector research. Let us have a look at each metric one by one.

Regional Presence: Diversification helps reduce risk. A company with its operations and market spread out across the country is more likely to continue operating despite any challenges. If one plant cannot operate for any reason, the others can fill in.

Market Share: A larger market share usually results from a strong distribution network. Customers might want to buy a specific cement brand but will usually buy one easily available near their location. 

Production Capacity: The larger the production capacity, the larger orders the cement maker can serve. Cement makers want to add capacity if the economy is seeing a boom in infrastructure and real estate sectors. However, the cost of adding capacity must also be justified with the expected projected income from that capacity.

Capacity Utilization: Let’s say a cement maker has an annual capacity of producing 100 mtpa worth of cement, but they produce only 70 mtpa. Effectively, they operate at a 70% capacity, or capacity utilization was 70%. 

As an investor, you must determine why the full capacity was not utilized. External factors such as natural calamities, pollution controls, and regulations could limit full utilization. For example, if heavy rains were to shut down production for three months, operating at 100% capacity for the remaining nine months would also mean only 75% utilization. Internal factors such as the unavailability of raw materials or labour could also hamper production.

Sales Volume: Not all that is produced is sold. In fact, some cement makers sell more than what they produce. They may buy volumes from other cement makers to fulfil their commitments to customers. 

Realization ₹/MT: Realization is the average selling price per unit. Higher prices lead to higher revenues. Comparison of the realization numbers of cement players can lead to various insights. The one with the highest number could be commanding a solid premium in the market or must be servicing locations others have not been able to service. The highest number could also suggest a larger share of value-added products in the total sales volume.
This snapshot from Ultratech Cement’s Q4 presentation for FY23 shows that grey cement realizations have slightly moderated compared to the previous quarter.

Input / Power and Fuel / Freight Cost Ratios: You can compute these ratios by dividing the cost item by revenues.

The smaller these ratios, the better. Looking for each of these ratios separately can help identify what part of the business is driving costs and which one is improving margins. Cement companies typically try to control all these costs by having these activities in-house – captive quarries, power plants, and fleets.

That is about it. This checklist should equip you well to comprehensively understand the cement industry and the companies operating in it.

In the next chapter, we will discuss the highly regulated and frequently disrupted insurance industry.

Key Takeaways

    • Understanding the cement sector requires understanding its value chain and cost centres.
    • The three costs – input, power and fuel, and freight costs – make up the largest portion of expenses
    • While cement companies try to improve margins by selling value-added products and improving branding, they focus mostly on costs. 
    • The cement sector does not have direct regulations. However, its heavy carbon footprint makes it a likely target of strict regulations. Complying with regulations could be an additional cost. Investors need to monitor the space constantly.
    • Be on the lookout for startups disrupting the cement industry with environmentally friendly solutions.


View all comments →
  1. Katturaja m says:

    Very usefull information

  2. Krishna moorthy says:

    It’s very interesting and informative

  3. Vineet Rajani says:

    Thank you!

  4. Karthik says:

    Sir this kind of content is very unique and i have not seen it anywhere else.

    Could you please give me some pointers as to how to do my own sector analysis? What resources, books and websites do you use?

    Thanks again for the superb content.

    • Vineet Rajani says:

      Thank you, Karthik!

      I mostly read the annual reports of a few players in any sector. Their “Management Discussion & Analysis” section gives a good perspective. If it is a highly regulated sector like banking or insurance, you can get a lot of information on the respective regulator’s website too.

  5. Charan Surya Teja M says:

    Good content, Excellent explanation, a non-finance/management persons can understand with this simpler explanation.

View all comments →
Post a comment