Mint Explainer: What a consolidation in the cement industry means for smaller players, consumers

The entry of the Adani Group in the cement business with the acquisition of the Swiss conglomerate Holcim’s shares in Ambuja Cement and ACC in June 2022 kicked off the consolidation frenzy. Market leader UltraTech Cement, not wanting to concede its position, opened talks with several players. A string of acquisitions has already helped the Adani Group emerge as the second largest player in the Indian cement business, but UltraTech continues to be much larger.

Most recently, Adani Group’s Ambuja Cements announced that it was buying a 47% stake in CK Birla group’s Orient Cement. In June, UltraTech acquired about 22.8% in India Cement and another 32.7% in July to gain majority control. The Adani Group has used Ambuja Cement also to acquire Sanghi Cement and Penna Cement in 2023 and 2024, respectively. 

UltraTech acquired the cement unit of Kesoram in 2023. Other big players in the cement industry include Shree Cement, Dalmia Bharat and Nuvoco Vistas. There were other transactions in the past two years such as Sagar Cement’s acquisition of Andhra Cement and Dalmia Bharat’s purchase of the cement business of Jaiprakash Associates.

While consolidation helps reorganise the cement industry, it can have a far-reaching impact on the market and consumers in the medium to long term, Mint explains.

Reduction in competition

Mergers and acquisitions are known to reduce competition in the market till the emergence of a new player with the capacity to cause disruptions. The Adani Group’s entry set off a slew of transactions in the cement industry and most analysts expect a few more transactions to conclude in the coming months. Reduced competition means that the bigger players have greater power to determine cement prices. Smaller firms will have no option but to be price takers.

Cement prices have not climbed despite strong demand arising from infrastructure creation by the government, increasing urbanisation and central schemes for building affordable houses. While a muted rise in prices benefits consumers and infrastructure developers, smaller producers are finding it difficult to survive as their profitability is under pressure. This will force some of them to sell out to the larger players who have the capacity to survive with lower profits.

Also, cement markets are extremely regional due to the perishable nature of the commodity and high freight costs involved in transporting it over longer distances. Pricing power of cement companies also depends on the capacity utilisation of plants within a region. For instance, in the highly fragmented cement industry in south India, companies currently have less pricing power as supply exceeds demand.

Also Read: Adani to build its first cement factory from scratch

Pressure on prices

Prices usually rise when demand or input costs increases. However, in the cement industry, prices have remained muted in the past two years despite strong demand growth. There is a view that this has happened as market leaders have held prices despite higher input costs to increase their market share, mostly at the expense of smaller players. Rating agency Icra, in a recent report, noted that the average price of a bag of cement was ₹375 in 2022-23, which declined to about ₹365 a bag in 2023-24. In the first half of the current financial year, prices drifted lower to ₹330 a bag on an average. Signs of firming up of prices were seen in September. Analysts expect prices to rise as the current consolidation phase cools and demand soars with a pick-up in construction activities after Diwali.

Stronger demand will improve capacity utilisation of plants in the short term, but fresh capacity is set to come on stream in the coming months. The Cement Manufacturers Association of India estimates the country’s installed capacity at about 670 million tonnes per annum. Rating agencies Crisil and India Ratings and Research have forecast a strong second half. Demand in the first quarter was affected by slower government spending amid the Lok Sabha election, and in the second quarter by the seasonal southwest monsoon. Crisil estimates the demand for cement to grow 7-8% year-on-year to about 475 million tonnes this fiscal, after a compound annual growth rate of about 11% between 2021-22 and 2023-24.

Also Read: Is Ambuja overpaying for Orient Cement?

Race for limestone mines and clinkers

Capacity expansion of plants and growth in output depends on easy availability of raw materials. Limestone is the primary raw material used in the manufacture of cement, and most cement manufacturing plants are therefore built in areas where limestone is mined. Limestone is first processed into clinkers, which are then combined with other minerals, such as gypsum, to produce cement. India has estimated 227.58 billion tonnes of total limestone resources, of which 19,028 million tonnes (8%) are placed under reserves category and 208.56 billion tonnes (92%) under ‘remaining resources’ category, according to Indian Minerals Yearbook 2022. However, annual production is about 400 million tonnes, which is less than the annual requirement of the cement and other industries, forcing many plants to import clinkers.

The availability of limestone and clinkers also plays a significant role in driving consolidation in the cement industry, with larger players looking to acquire smaller manufacturers who have limestone mining rights. Rajasthan is a leading producer of limestone, followed by Andhra Pradesh, Madhya Pradesh, Chhattisgarh, Karnataka, Telangana, Gujarat and Tamil Nadu. 

Cement manufacturing is more fragmented in southern India compared with elsewhere in the country and the larger players do not have a clear dominant position there. This explains why many acquisition targets of Ultratech and Ambuja are companies based in the south.