Anticipating a huge growth in demand, most cement manufacturers went in for huge capacity addition over the last five years, only to find that they were wrong.
India Cements attributes much of the decline to lower demand in the southern states, particularly Andhra Pradesh, apart from high input costs and the current power situation. In an interview to The Hindu , Vice-Chairman and Managing Director of India Cements N Srinivasan details how despite the present scenario, if the India growth story is to still be believed in, one must first believe in the cement industry.
Give us an overview of the current scenario, and how the industry deals with the cyclical mismatch between demand and supply?
The mismatch between capacity created and demand is there – it was there last year also. Capacity creation has been in bunches and ever since de-control in the 1990’s, capacity creation has always been generally ahead of demand. However, whatever additional capacity was created was reasonably quickly absorbed. The demand growth was good. We had a 8 to 9 per cent compounded annual growth for almost 20 years after decontrol.
In the last two-three years, it has become sluggish. It is more pronounced as it comes after a high-growth period. It was in this period that India increased its capacity from 170 million tonnes to 310 million tonnes — most of this has come in the South.
After all, limestone is only available in seven or eight places in the country and 25 per cent of the country’s limestone is in Andhra. So it’s only natural as we go along and capacity is created only in these States, it can pose temporary setbacks from time to time.
This is the reason today that you have a situation where the capacity utilisation in the South is about 65 – 67 per cent whereas the utilisation in other regions is higher.
If one looks a little deeper, you can see that Andhra was growing at 24 per cent compounded. That has become negative now. Similarly, Karnataka has also slowed down. This has pulled the growth in the South. We expect a slow revival now, although much depends upon how the economy bounces back and whether investment goes into housing and infrastructure which can spur growth.
What kind of risk does price pose to demand?
Historically, there has not been a correlation. Cement is a product that has its own cost of production, and one has to keep it in mind when fixing the price. The fact that there is less demand, or you operate at lesser capacity doesn’t mean you can afford to cut prices.
In a situation where capacity utilisation is less and demand is strong — will this allow extraneous factors to come in and attract Government regulation?
Cement is a success story of deregulation. From the time we became independent till 1989 when cement was under price and distribution control by the government, the capacity created in the country was hardly anything. Capacity in 1988 was around 45-50 million tonnes. That was the product of 40 years of control. In 20 years of de-control, the capacity has gone to 330 million tonnes. If this capacity had not been added, India’s growth would have been severely constrained. Growth would have been severely curtailed because the deficit could not have been sourced from outside. It is very incorrect to think that regulation will spur growth.
Is cement still a politically charged commodity?
That may be your perception. I don’t see why cement should be singled out. It is one of the largest employers, and the construction industry has the greatest multiple in terms of secondary and tertiary employment. This is one industry which has ploughed all its profits back into creation of additional capacity. It deserves praise — which it, unfortunately, does not get.
What needs to be done to exit this demand slump?
The growth so far this year has been 6 per cent on an all-India level, and much lower in the South. In many countries, this would be considered very good. But India, which has been used to a 10- 12 per cent growth, and which has created capacity on the back of an expected double-digit growth, has been caught short by the slump. As a manufacturer, all I can say is that we are seeing slow signs of revival in demand.
What should be done to bring back accelerated demand?
A combination of several factors has led to this slow down - the global slowdown caused by the financial crisis, domestically the drop in investment in infrastructure and housing coupled with a high interest-rate regime and not to mention the inflation.
They have all played a role in sapping consumer confidence and capacity.
This has not been helped by price increases that have taken place across the board — petroleum products, coal, railway freight, power etc. All costs have gone up. You tell me which road project has been completed? Banks have stopped infrastructure lending. It’s like a pall of gloom. Slowly now it looks like some activity is there.But would people want to expand now, given this situation?
See, cement is a long-term business. You cannot look at cement on a quarter-to-quarter basis or a year-to-year basis.
If you take a five-to- ten year outlook on the cement industry, it is outstanding. We are a sixty-year-old company.
We have stood the test of time, control, decontrol etc. If I take a five-year view, it is good. The business is good. This is how people should look at the cement industry — it is a building block industry. If you believe India has growth potential, then one must believe in the cement industry as well.
Despite the talk of gloom, companies still make profit. How does one explain this?
We aren’t making a super profit, we are making decent profit. As a chief executive, I have to look at all stakeholders, particularly my shareholders. I have to deliver some growth; I have to deliver some profit. I still have a lot of capacity that is unutilised which if utilised would make a big difference to my bottom line.
The cement industry is always seen as a villain…
We don’t agree with the views of the Competition Commission. We are in appeal, and it is sub-judice. Just the other day, I was reading about a leading company in another sector which said it was going to run two shifts. This happens. Other industries also have this same problem. If the demand growth is not there, I must stop my plant because I cannot store my cement as it will create environmental problems. There is a finite capacity that I can store. Therefore, I only produce what I can sell, and I think that is good management.
Does the whole industry believe that there is no point in selling at a loss?
It is my belief – and maybe other prudent people will also think so. I think people have been burnt so much by trying to sell at unreasonable prices, that people are looking around and looking at other industries which have suffered. Any prudent management will look at selling at a price which is above its cost.