Wednesday, September 20, 2017

Cement & Concrete

Stepping up work on stalled projects will boost cement consumption

 

 

The meeting over coffee at a mall in suburban Mumbai, coming as it did a day after Holcim-Lafarge announced their new global business dalliance, offered all the trappings of an excellent discussion over the state of Indian cement affairs. And it did that and more. SUMIT BANERJEE, former VICE CHAIRMAN, RELIANCE CEMENT, in a discussion with SHRIKANT RAO, was also wont to laugh away recent media whispers of his ‘Second Coming’ at the helm of cement major ACC being imminent anytime soon. Excerpts from the interview:

 

 

On the implications of the Holcim-Lafarge merger on the Indian cement market: At a global level it is an important event because two large construction material companies are getting together and it obviously means some significant developments for customers, employees, shareholders etc. I think normally such mergers are more beneficial for shareholders and less so for customers and employees. But that’s in general what we have seen with mergers globally. I have no reasons to believe that this will be any different from the rest. I think investors and shareholders have found right reasons for these two companies to get together. I believe at the end of this between these two companies will be able to save some money. It however remains to be seen whether they are able to offer better products for their customers and do something in terms of conservation of resources, more than what they are doing on a standalone basis. In India they will create a greater than 60 million tonne capacity and will be neck and neck with the current number one Aditya Birla Group’s Ultratech.

 

 

On the benefits of the consolidation for the Indian market: There are one or two areas in which collaboration will bring improvements getting realised and that could be in the areas of energy efficiency, sustainability practices, alternative fuels, etc., in addition to the usual logistic benefits coming from cross bagging/cross-branding.

 

 

On the impact of the merger on the ACC brand name: It’s a completely hypothetical situation but if I was there I  would obviously like to retain and strengthen the ACC brand because cement is a product in India which has got  a lot of retail activity and in retail market brands play a good role. So ACC being there for a long time has a brand positioning of trust and that is an asset which any entity would like to retain, strengthen, and exploit.

 

 

On the India market prospects for the new entity:  India is a significant market – it’s a big cement market in terms of size and growth potential. One can ignore India only at his own peril, but also don’t forget that emerging markets like India, Egypt or Indonesia are being looked down upon as relatively riskier, by the European companies and European investors and allike. They love the returns, the money, but hate the volatility. Ideally we would be happiest if we get the best of returns with lowest of risks - that’s the kind of situation we would like to have, but unfortunately it doesn’t happen in real life. Higher return carries higher risks.

 

 

On the possible Holcim-Lafarge strategy for India: I think ACC and Ambuja were a substantial part of global Holcim in terms of sales turnover and profitability. Contrarily, Lafarge India was not such a big part of global Lafarge. In the combined entity the capacity in India is becoming smaller in size in proportion to the overall as far as Holcim is concerned. We may love to think that the people at the helm of affairs in companies like Holcim and Lafarge are absolutely preoccupied and worried about what to do in India, but that need not be not true. They have bigger things to deal with. India is just a small part of their integrated business now; they have bigger challenges to deal with;  particularly in the initial months of the post-merger announcement, there are a lot of regulatory issues to be taken care of in Europe and America. My guess is that the question ‘What to do in India?’ will perhaps not be occupying a main position in their minds at this moment.

 

 

On overcapacity and the huge demand supply mismatch: Oversupply or overcapacity has been a regional phenomenon. It is more a matter of the south than in the north or the east that this issue is coming up. I do believe that in the south capacity utilisation has fallen in the range of 60 percent. Andhra Pradesh will once again get back to the days of glory after the elections to the Telangana Assembly and Seemandhra which will take place this calendar year. The new Chief Ministers will bring in change. By the end of 2015, Andhra Pradesh will be at the vanguard of cement consumption growth in the south. Right now cement growth in Andhra Pradesh is declining. Southern demand growth has declined largely on account of the slump in Andhra Pradesh and not so much because of Karnataka or Tamil Nadu.

 

 

On what is required for cement firms to support India’s infra agenda: This $1 trillion infrastructure plan is something like a mirage. It is quite sad that India’s per capita cement consumption is even lower than most developing countries. The reason it is so low is not that India is doing very poorly in housing but the reason is India is doing very badly in infrastructure. If you see the pie chart of cement consumption in India vis-à-vis the cement consumption in China per capita the biggest difference will be in the area of infrastructure. Cement consumption in infrastructure projects is the biggest opportunity for the cement market in India which is still untapped. But I am not very optimistic about this immediately because the $1 trillion infrastructure plan can only come through public-private partnerships and 60 percent of this is considered to be so, from a planning perspective. Now, There are three to four major things which need to be set right by any new government before investment flows into this sector but these are not going to be, nor can be, addressed overnight. Number one is that the maturity of the financial market and availability of financial products appropriate of financing for long-term infrastructure projects has to come. It doesn’t exist today. Secondly, public private partnership has to happen for private investment to come in for infrastructure. And any public-private partnership actually means a contract between a government player and a private entity and so we will be looking at disputes and dispute resolution mechanisms, which in India currently is archaic. There is no time limit for arbitrations; there are no properly set guidelines for arbitrations. So we need efficient and quick unbiased process of dispute resolution. Without that even domestic investor is finding it difficult to come in. The third one is the way the infrastructure projects are being bid for. Many times infrastructure projects like roads, metros or airports are bid for at a stage where these projects are not ready in terms of land acquisition, environmental clearances and this means the projects are exposed to risks which private investors cannot take. It is my view that projects like roads, etc.,  must only be bid for only after first forming a Special Purpose Vehicle (SPV) which will make applications for all the land acquisitions, environmental and statutory clearances, and obtain the necessary clearances through the efforts of an efficient government body. You can only get a successful results on private participation in the infrastructure front when you have all approvals in place before the actual bidding. The fourth requirement in my view is that of having a Ministry of Infrastructure in place. Industry bodies like CII have been suggesting it for quite some time. Today infrastructure activities of the country are being steered by various bodies like the Planning Commission, the Ministries for Industry, Surface Transport and Finance and many others– there are several of them. Therefore, it is highly recommended that we should have an Infrastructure Ministry particularly in this phase of our country’s development when pace of infrastructure development leaves a lot to be desired. So the formation of an Infrastructure ministry with apex powers for coordination and review of infrastructure projects is being recommended and that needs to be done by the new government as soon as possible. As you can see, realistically speaking none of this is going to happen overnight as with the new government in place one will have to do things systematically; investigate why infrastructure development has failed to accelerate, examine the constructive inputs that come from important stakeholders, and then find out what needs to be done and then act on it. In doing all this, the new govt will have to carry along diverse and disparate agencies including state govts. This is tough, and time taking, even for a magician.

 

 

On the outlook for the cement sector after the elections: I am sure the new government that will come into being will bring change and improvement which is required by us. I do think that it is a matter of tradition that after 10-15 years change happens. People get bored of the same people in governance – there are the normal and repetitive issues of corruption, indecisiveness and people then look for a change. Whether this change will bring about something good to the country in the long term or not is another point – what I mean here is sustainable improvements in governance. Stepping up work on stalled projects will certainly give a boost to consumption of cement.

 

 

On how 2014-15 will pan out for the cement sector: It will be slightly better than what we saw in 2013-14. I never thought that we would see such a drop in growth as seen last year. I would expect Cement demand to grow at least by 6-8 percent in current financial year. Sheer improvement in sentiments and business optimism will catalyse private investments in various unregulated sectors, and it is also likely that many of the stalled or delayed projects will be kick-started. All these factors are positives for immediate spurt in demand. The Budget, which is expected in June, will also spur direct govt spending in construction etc. However, it is of relevance to mention in this context that Data collection for cement production, despatch and prices has gone from one extreme of “too much data”, to the other extreme of unreliable macro data. On one extreme was the famous Cement Manufacturers Association (CMA) report which every month used to disclose how much cement was consumed by every district of the country, which company and which plant supplied how much cement and at what price. Now, we have gone to another extreme wherein there is no structured monthly data available at all. We now have companies like ACC, Ultratech, maybe Lafarge and a few others who are trying to put together some monthly data, to derive some kind of all-India numbers. Some reliable “high-level data on volumes of sales are available only on quarterly basis, based on disclosures by listed companies.

 




Leave a Comment

Name  
Email Address
(will not be published)    
Website
Comment