7166248 Indian Cement Industry

5/21/2018 7166248 Indian Cement Industry

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INDIAN CEMENT INDUSTRY


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INDIAN CEMENT INDUSTRY GroupC6Members:

Name Akansha Mishra Ankita Jain Ashish Sharma Indranil Bhowmick Jyoti Jain Kum

9899713450 [email protected] 9810232212 [email protected] 9210302016 [email protected] 9958252785 [email protected] 9899619114 [email protected] 9891766934 [email protected] 9350539385 [email protected]


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CONTENTS

1. ACKNOWLEDGEMENT

2. EXECUTIVE SUMMARY

3. LITERATURE REVIEW

4. INTRODUCTION

5. OBJECTIVE

5. METHODOLOGY 6. ANALYSIS 7. CONCLUSION 8. BIBLIOGRAPHY


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ACKNOWLEDGEMENTWe take this opportunity to express our profound sense of gratitude and respectto all those who helped us throughout this endeavor. We owe our regards to Mrs.MEGHNAA SHARMA for his cooperation and valuable support and for giving us the opportunity to undertake this project and providing the necessary infrastructure.We would like to express our heartfelt thanks to Minto and Bisender for helpingus in various printouts and photocopies from time to time at odd hours. Last butnot the least; we owe our overwhelming gratitude to our families and friends who gave us constant support and motivation to continue with this endeavor.


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Executive SummaryThe cement industry is one of the main beneficiaries of the infrastructure boom.With robust demand and adequate supply, the industry has bright future. The Indian Cement Industry with total capacity 151.2 million tones is the second largest after China. Cement industry is dominated by 20 companies who account for over70% of the market. Individually no company accounts for over 12% of the market.The major players like L&T and ACC have been quiet successful in narrowing thegap between demand and supply. Private housing sector is the major consumer of cement (65%) followed by the government infrastructure sector. Similarly northernand southern region consume around 20%-30% cement while the central and westernregion are consuming only 18%-16%. The company continues to emphasize on cost c

utting through enhanced productivity, reduction in energy costs and logistics expenses. The cement sector is expected to witness growth in line with the economic growth because of the strong co-relation with GDP. Future drivers of cement demand growth in India would be the road and housing projects. As per the WorkingGroup report on Cement Industry for the formulation of the 11th Plan, the cementdemand is likely to grow at 11.5 per cent per annum during the 11th Plan and cement production and capacity by the end of the 11th Plan are estimated to be 269million tones and 298 million tones, respectively, with capacity utilization of90 per cent. In brief we have covered Cement market including market size, composition, and market growth, latest Trends & Opportunities, different policies adopted by the government for the Indian cement industry, cement production and capacity utilization as well as the current scenario of demand and supply.


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CEMENT INDUSTRYLiterature reviewIndia is the 2nd largest cement producer in world after china .Right from layingconcrete bricks of economy to waving fly over's cement industry has shown and shows a great future. The overall outlook for the industry shows significant growthon the back of robust demand from housing construction, Phase-II of NHDP (National Highway Development Project) and other infrastructure development projects.Domestic demand for cement has been increasing at a fast pace in India. Cement consumption in India is forecasted to grow by over 22% by 2009-10 from 2007-08.Among the states, Maharashtra has the highest share in consumption at 12.18%,followed by Uttar Pradesh, In production terms, Andhra Pradesh is leading with 14.72%

of total production followed by Rajasthan. Cement production grew at the rate of 9.1 per cent during 2006-07 over the previous fiscal s total production of 147.8 mt(million tons). Due to rising demand of cement the sales volume of cement companies are also increasing & companies reporting higher production, higher sales and higher profits. The net profit growth rate of cement firms was 85%. Cement industry has contributed around 8% to the economic development of India. Outsiders (foreign players) eyeing India as a major market to invest in the form of either merger or FDI (Foreign Direct Investment). Cement industry has a long wayto go as Indian economy is poised to grow because of being on verge of development. Despite the growth of Indian cement industry India lags behind the per capita production. Supply for cement is expected to remain tight which, in turn, willpush up prices of cement by more than 50%. The most important factor for betterprices is consolidation of the industry. It has just begun and we will see more

consolidation in the coming years. Other budget measures such as cut in importduty from 12.5 per cent to nil etc. are all intended to cut costs and boost availability of cement. Sadly the adverse effects of global slowdown have not speared this industry too. Demand is sluggish, the government is keeping an eagle eyeon prizes, domestic coal and pet coke, prizes have increased sharply and utilizations rates are down. The numbers coming out are a reflection of grim times. ACCthe country's largest cement company that's controlled by Swiss giant HOLCIM, registered 2% fall in august sales. The biggest fall since Feb. 2007. Production fellby 5%. To stand against the problematic situation, government as well as cement


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industry has taken some steps. Companies are focusing on cost of transportation.One of the strategy is to decrease dependence on road & opt for sea logistics as that can cut transportation cost by 30- 50 %. Some plants are adopting futuristic plan such as setting up captive power plant, moving closer to the customersby creating clicker, crushing, and capacity in key markets, to be more customercentric to generate better revenue. India should push for stricter regulations of market place as to control the prices of big companies and prevent them from forming cartels and exchanging information. To fight with the high inflation, government wants to import more cement from Pakistan .However cement prizes are notvery much high as other items but still they are increasing. And the reason ofhigh prize is surging cost of raw material and transportation cost. Apart from t

his government also discussed with cement industry not to have increase in prizes and keep consumer interest in mind. Now the question arise in front of the government is whether the demand by the government is possible to increase throughexpenditure on infrastructure or not according to the current state of economy when so many crises are going on or how the government allocation of US$ 3.23 billion for the National Highway Development, Project will keep the demand for cement alive? And to what extent the prizes of cement should be increase so that consumer can't affect.


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OBJECTIVESTo study Cement market including market size and composition, market growth. Toanalyze latest Trends & Opportunities. To Study policies of government related to Cement industry. To analyze the Cement production and capacity utilization. Totrace out current scenario of demand & supply.

METHODOLOGY

The research is based on the information collected from various types of secondary resources. The method adopted for these findings is secondary method as therewas limitation in collecting primary data about the cement industry. The main aim is to focus on demand , supply , major players and trends of the cement industry. The following sources have been taken for the preparation of this research:

Internet reports Books Journals


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INTRODUCTION

T

he cement industry is experiencing a boom on account of the overall growth of the Indian economy. The demand for cement, being a derived demand, depends primarily on the industrial activity, real estate business, construction activity, andinvestment in the infrastructure sector. India is experiencing growth on all these fronts and hence the cement market is flourishing like never before. Indian c

ement industry is globally competitive because the industry has witnessed healthy trends such as cost control and continuous technology up gradation. Global rating agency, Fitch Ratings, has commented that cement demand in India is expectedto grow at 10% annually in the medium term buoyed by housing, infrastructure and corporate capital expenditures.

The constraints faced by the industry are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet Secretariat under the Chairmanshipof Secretary (Coordination). Its performance is also reviewed by the Cabinet Committee on Infrastructure. Fast rising Government Expenditure on Infrastructure sector in India has resulted a higher demand of cement in the country. In the same direction, participation of larger companies in the sector has increased.

After having gone through a period of over-supply and the phase of massive capacity additions (latter half of the previous decade), the industry is currently ina consolidation phase, with capacity additions coming up to cater to the increasing demand. Demand has been driven by a booming housing sector and increased activity in infrastructure development such as state and national highways. Whilethe demand is growing at a robust pace of 8% to 10% annually, the paucity of major capacity additions is putting upward pressure on the cement prices. The top four companies account for almost 40% of the total domestic capacity, while the remaining is distributed among the large and mini plants in the industry.

CURRENT SCENARIOThe Indian cement industry is the second largest producer of quality cement, which meets global standards. The cement industry comprises 130 large cement plants

and more than 300 mini cement plants. The industry

s capacity at the end of theyear reached 188.97 million tons which was 166.73 million tons at the end of the year 2006-07. Cement production during April to March 2007-08 was 168.31 million tons as compared to 155.66 million tons during the same period for the year 2006-07.Despatches were 167.67 million tons during April to March 200708 whereas155.26 during the same period. During April-March 2007-08, cement export was 3.65 million tons as compared to 5.89 during the same period.


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MAJOR PLAYERSCompany ACC Gujarat Ambuja Ultratech Grasim India Cements JK Group Jaypee GroupCentury Textiles Madras Cements Birla Corp. Lafarge Installed Capacity 18,640 14,860 17,000 14,115 8,810 6,680 6,531 6,300 5,470 5,113 5,000 Production 17,902 15,094 13,707 14,649 8,434 6,174 6,316 6,636 4,550 5,150 4,573

With an installed capacity of around 157 million tons per annum (mtpa) at end-March 2006, large cement plants accounted for 93% of the total installed capacityin India. The installed capacity is distributed over across approximately 129 large cement plants owned by around 54 companies. The structure of the industry is

fragmented, although, the concentration at the top is increasing. The fragmented structure is a result of the low entry barriers in the post decontrol period and the ready availability of technology. However, cement plants are capital intensive and require a capital investment of over Rs. 3,500 per tonne of cement, which translates into an investment of Rs. 3,500 million for a 1 mtpa plant.

PRODUCTIONThe official data released by the Cement Manufacturers Association that showed that the monthly production in January-June this year is higher than the previousyear. PRODUCTION FIGURES2006 January February March April May June 13.07 12.26 14.15 13.23 12.99 12.91 2007 14.05 13.00 14.95 13.97 14.26 13.66*

Figures in million tonne * Provisional figures Source: Cement Manufacturers' Association


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Production has been going up for the last two years. Measures have been taken toenhance production further. The industry will add 80-100 million tonne in the next three or four years. In 2004-05, the industry produced 127.57 million tonne, rising to 155.31 million tonne in 200607 up 21.74 per cent. In the current financial year, production is expected to cross 165 million tonnes, he added. The chief finance officer of a leading cement company said a price hike took place lastyear, but not this year. Why single out the cement industry? Other sectors, suchas steel, have also hiked prices, he said, adding that steel companies raised prices by Rs 500-1,000 a ton this month. The managing director of a multinational cement company said the taxes levied on the cement industry are one of the highest in the country. We contribute nearly 67 per cent of our income, including royal

ty payment for limestone, to the exchequer. Instead of giving relaxation on thetax front, the industry is being pressured to go in for price cuts, he added.

PROCESS TECHNOLOGYWhile adding fresh capacities, the cement manufacturers are very conscious of the technology used. In cement production, raw materials preparation involves primary and secondary crushing of the quarried material, drying the material (for use in the dry process) or undertaking a further raw grinding through either wet or dry processes, and blending the materials. Clinker production is the most energy-intensive step, accounting for about 80% of the energy used in cement Production. Produced by burning a mixture of materials, mainly limestone, silicon oxides, aluminum, and iron oxides, clinker is made by one of two production processes: wet or dry; these terms refer to the grinding processes although other configu

rations and mixed forms (semi-wet, semi-dry) exist for both types. In the dry process, the raw materials are ground, mixed, and fed into the kiln in their dry state. In the wet process, the crushed and proportioned materials are ground withwater, mixed, and fed into the kiln in the form of slurry. The choice among different processes is dictated by the characteristics and availability of raw materials. The dry process is the more modern and energy-efficient configuration. Ingeneral, the dry process is much more energy efficient than the wet process, and the semi-wet somewhat more energy efficient than the semi-dry process. The semi-dry process has never played an important role in Indian cement production andaccounts for less than 0.2% of total production. Different types of cement thatare produced in India are:

Ordinary Portland Cement (OPC): OPC, popularly known as grey cement

Portland Pozzolana Cement (PPC) White Cement: White cement is basically OPC


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Portland Blast Furnace Slag Cement (PBFSC) Specialized Cement Rapid Hardening rtland cement Water Proof Cement

DEMAND & SUPPLYThe demand drivers for the cement sector continue to be housing, infrastructureand commercial construction, etc. We expect the proportion of infrastructure intotal demand to improve further in future, as the thrust on infrastructure development is on the rise. During April-November 2007, cement demand grew by 10 percent year-on-year (y-o-y) propelled by the growth witnessed in end user segmentssuch as housing, infrastructure etc. CRISIL Research expects demand to remain s

trong and grow by over 12 per cent in the next 2 years. Cement demand is expected to outstrip supply for the next year and a half as no major capacities are coming on-stream, thus providing enough flexibility to cement manufacturers to further hike the prices. Today, cement from Andhra is going all over India, including Assam, Meghalaya, Jharkhand, Orissa, West Bengal, Chattisgarh, Gujarat and Maharastra. More cement is likely to flow into Tamil Nadu from the state in view ofcut in sales tax. Any further increase in demand in the South India will benefit the cement industry here. Cement movement from Gujarat to Mumbai is also coming down due to exports while cement movement from Orissa into Andhra has stoppedand, in fact, cement is flowing into Orissa as well. Earlier in 2006-07, the housing sector alone consumed 65 per cent of the total domestic consumption. With the launch of several infrastructure projects, the housing consumption may come down to 55 per cent as the infrastructure and other sectors are expected to move

up to 45 per cent from the present 35 per cent. Still, the main sector of consumption continues to be housing, including commercial space, occupying more than 60 per cent. The current demand in the state for 2005-06 is expected to cross 15million tons (11.5 million tons). We expect the demand here to go past the 17.5-million mark in 2006-07 in view of irrigation and infrastructure projects beingtaken up in the state. Weaker sections' housing, construction of public toilets, schools in rural areas apart from several private and public infrastructure projects will also give tremendous boost to the cement consumption in the state. Mostimportantly, irrigation projects, worth nearly Rs 1 lakh crore, will trigger unprecedented demand for the next 5-7 years. Cement consumptions are as follows:


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ZONE ZONAL CONSUMPTIONS Year 200607 Year 200708

East South North west central

17% 26% 21% 20% 17%

17% 30% 20% 18% 16%

DEMAND DRIVERSIndian cement demand skewed towards housing

The demand from the housing sector is ~53% of the total Indian cement demand.

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There are fears of a slowdown in the demand from the housing sector due to a drop in real estate prices in the country. The worry is that builders may postponeconstruction of new buildings if the property prices were to correct.


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Infrastructure to give demand a big boostOur analysis shows that Infrastructure should be the biggest growth driver for cement demand in the country. If we were to look only at order books of the top eight construction and manufacturing equipment companies in India, we find that their combined order book has virtually doubled over the last two years from INR1,000bn (USD25bn) to INR1,950bn (USD48.75bn) for completion over the next 24-30 months.

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Assuming 10% cement intensity in structures, the order book of these 8 engineeri

ng companies would incrementally add 4-6m tons of demand annually.

Infrastructure spending to propel the growth in medium termAs seen from Figure 3, India is likely to spend ~USD211bn on infrastructure overthe next five years. These investments are much lower than the government's estimate of USD320bn of spends over the same period. Our analysis, based on the bottom-up approach, suggests that the projects are likely to kick off on time. Therefore, the infrastructure investments could drive an incremental cement demand of46m tonnes over FY07-12E.


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Pan-India cement demand to grow at 10% CAGR over FY07-10Based on our sectoral outlook, we have marginally revised our demand growth assumptions in India to 10% from 9%. The key reasons are: (1) Stronger-than-expectedorder book of Indian construction and engineering companies (2) No slowdown seen in construction of houses at important consumption centers4

COSTOver the past five years, cost of cement production has grown at a CAGR of 8.4%.

Also, the producers have been able to pass on the hike in cost to consumers onthe back of increased demand. Average realizations have increased from Rs. 1,880per tonne in FY 03 to Rs. 3,133 per tons in FY 07, at a CAGR of 13.6%, which has been reflected in higher profit margins of the industry.


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To reduce the cost of production, the industry has focused on captive power generation. Proportion of cement production through captive power route has increased over the years. Also, cement movement by rail has increased over the years. Freight and energy costs are also increasing; however, in the current market scenario, manufacturers have the flexibility to pass on the increase in costs to end-consumers. Let us have a look at the cost factors affecting the cement industry

Capacity Utilization:

Since the industry operates on fixed cost, higher the capacity sold, the wider the cost distributed on the same base. But one should also keep in mind, that the

re have been instances wherein despite a healthy capacity utilization, margins have fallen due to lower realizations. The cement industry is energy intensive innature and thus power costs form the most critical cost component in cement manufacturing (about 30% to total expenses). Most of the companies resort to captive power plants in order to reduce power costs, as this source is cheaper and results in uninterrupted supply of power. Therefore, higher the captive power consumption of the company, the better it is for the company. Since cement is a bulkcommodity, transporting is a costly affair (over 15%). Companies, which have plants located closer to the markets as well as to the source of raw materials havean advantage over their peers, as this leads to lower freight costs. Also, plants located in coastal belts find it much cheaper to transport cement by the searoute in order to cater to the coastal markets such as Mumbai and the states ofGujarat and Tamil Nadu. On account of sufficient reserves of raw materials such

as limestone and gypsum, the raw material costs are generally lower than freightand power costs in the cement industry. Excise duties imposed by the governmentand labor wages are among the other important cost components involved in the manufacturing of cement. The company should have a consistent record of outperforming its peers on the operational performance front i.e. it should have higher operating margins than its competitors in the industry. Factors such as captive power plants, effective capacity utilisation results in higher operating marginsand therefore these factors should be looked into. Since cement is a regional play on account of its high freight costs, the company should not have all its plants concentrated in one region. It should have a geographical spread so that adverse market conditions in one region can be mitigated by high growth in the other region

Power:

Freight:

Operating margins:


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PRICING FACTORS

Prices across the country have risen substantially buoyed by the robust demand for cement. Prices have risen by more than 30 per cent during April-January 2007on an all India basis, with the northern and eastern regions witnessing the highest and lowest growth of 32 per cent and 16 per cent, respectively. One of the key factors that seem to have a major say on stock price movements of cement companies are cement prices! Given the volatility and seasonality involved in the same, should one place such high weightage on cement prices to ascertain investment decision in cement stocks. Since cement is essentially a commodity, brand premium is almost non-existent in the industry. In terms of value-addition, this sec

tor ranks below even steel and aluminium. It is a highly capital-intensive industry. The Indian cement industry has to be viewed on a regional basis viz. northern, western, southern and eastern. Since demand is unfavorable in certain regions, cement companies that focus on these regions are affected if there is a decline in prices. The Indian cement industry is also highly fragmented with the topsix accounting for about 60% of industry capacity. The rest 40% is distributed among 40 small players. The cement industry in India has emerged as the second largest in the world, boasting of a total capacity of around 144 m tons (includingmini plants). However, on account of low per capita consumption of cement in the country (110 kgs/year as compared to world average of 260 kgs) there is stilla huge potential for growth of the industry. a retail investor has to keep a tabon demand growth and capacity expansion plans for players. The level of fragmentation and competition also play an important role in determining the prices sin

ce the larger the number of players, the more difficult it would be to ensure stability in prices. Institutional sales or big government contracts are normallywon through bidding and this can also help determine the level of prices for specific projects. Lastly, cement like any other commodity business is cyclical innature and hence its realisations also depend upon the position of industry in the business cycle. Today, the prices across the country are going up to unprecedented levels and plants here are able to reach out to faraway places in tune with the demand. As a result, all the cement plants in the state are operating at 100 per cent capacity utilisation and with improved bottomlines. The logistic cost for AP companies in meeting the local demand is less compared to other statessince cement plants are scattered all over the state. Earlier, the local demandwas hardly 30 per cent of the capacity and the prices in other parts of the country were also not attractive due to transport costs. Now, the local demand is mo

re than 60 per cent of the capacity and the prices elsewhere in the country arereaching the viable levels of Rs 180 to Rs 200 per bag. So, now the logistic costs are not coming in the way


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of AP players to dispatch cement to distant places. Also, as limestone is available only in some states like AP, we will always enjoy the benefit.

WHERE DOES INDIA STAND?India s annual per capita cement production of 0.13 tonnes in FY2006 is significantly below the world average of 0.3 tonnes and China

s production of 0.76 tonnes during 2004. It has been observed that cement consumption increases along withthe rise in per capita income in developing countries. Thereafter, once all themajor developmental projects are in place and the country has a per capita income comparable with that of the developed nations, the demand for cement stagnates/declines. Accordingly, the per capita cement consumption also stagnates/declin

es. Growth in population density is a minor (but steady) driver of demand growthfor cement in all countries. Cement consumption has a strong co-relation with GDP growth. High GDP growth leads to high cement consumption. The reverse is truewhen GDP growth declines. The cement intensity of GDP (i.e. rate of growth of cement consumption relative to GDP growth) is different for different countries.For a under-developed country, the cement intensity of GDP is very low. It riseswith the progress in economic development, reaches a peak level, and then starts declining once all the developmental projects are in place and the country hasachieved a very high level of economic growth. While the Indian cement industryis in a surplus position since a long time, the surplus position is gradually declining. While limited greenfield capacity is envisaged in the near to medium term, it is very easy to increase capacity through either brownfield projects orby resorting to manufacturing blended cements. As per present expansion plans, a

n additional 6.6 mtpa of capacity is expected to be operational in FY2008. Considering an expected production and consumption growth of 10% during FY2008 the demand supply position of the Indian cement industry is expected to improve

OPPORTUNITIES, THREATS, RISKS AND CONCERNSThe cement industry is going through its boom period with full capacity utilization. Powered by the GDP growth of 8-9%, the annual demand for cement in the country continues to grow at 810%. As per NCAER study, under high growth scenario, the demand for cement (including exports) is expected to increase to 244.82 million tonnes by 2010-11. As per the study, the demand is expected to be much higherat 311.37 million tonnes, if the optimistic projections of the road and the housing sectors are met. The industry has responded to this with substantial new capacity announcements. The materialization of these capacities, however, is likel

y to be delayed due to a number of factors including timely delivery of equipment and construction of the plant due to the heavy order book position of the suppliers. It is expected that demand growth will outstrip supply till the materialisation of such new capacities. However, the current high level of internationalcrude prices and its impact on the domestic prices of petroleum products is likely to make a dent in the profitability but its impact will have to be seen depending upon the ability of the economy to pass on such cost increase to the


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consumer. While the freight cost could be optimized on the imported coal throughusage of company's own ships for part of the quantity, the international prices of imported coal and its volatility together with the strengthening of the dollaragainst rupee could derail this. This could impact the delivery prices of imported coal and also the cost of production. The Government has taken steps to increase the availability of indigenous coal for its expanded capacity across various plants which can mitigate the impact of such high cost of imported coal for the plants located near the coal fields in India. The Government's continuing efforts to rein in cement prices by freeing imports and banning exports could artificially disable the normal market price mechanisms for determining the price.

CONCLUSION1. The rise in the price of cement is because of the gap of demand & supply in the market. The demand for cement is much higher than its actual supply. But withthe production maximization, which can be encountered in next few year, this gap may narrowed down, that may ensure the market to be in equilibrium. 2. Decreasing per capita consumption doesn't affect the total consumption for the cement. Itmeans the infrastructure; contacted housing is using the bulk of the production. 3. In spite of High price of the product, the hick of demand because of the increasing rate of infrastructural development. 4. Domestic price of cement is rising as well as the imported cement price is lowering. So altogether the supply of the cement, which is affordable, will increase. This may in decrease the gap between supply and demand. 5. Major Demand was from the housing sector, which mayshift to infrastructure as lots of infrastructural development processes has al

ready being taken up & due to the increased price, housing segment started showing a slowdown.


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WHERE DOES FUTURE LIES?

The government has till now taken several initiatives to maintain the current level of demand and to boost it further: The Planning Commission for the formulation of X Five Year Plan constituted a Working Group on Cement Industry for thedevelopment of cement industry. The Working Group has identified following thrust areas for improving demand for cement; Further push to housing development pgrammes Promotion of concrete Highways and roads Use of ready-mix concrete in large infrastructure projects.

Following points also represents some measures that are required for futuristic

growth of cement industry: Signs of a revival growth in the housing seal road fund established for national highways and railway over bridges to provide the necessary impetus expansion plans, Greenfield projects on the anvil Demand - supply balance expected in the next 12 - 15 months Higher capacity utilization likely in the future Encouraging trend in demand due to pick-up in rural housing demand and industrial revival


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BIBLIOGRAPHY1. www.managementparadise.com 2. www.zeenews.com/articles 3. www.economictimes.inds.com 4. www.researchandmarkets.com/reports

5. T.R. JAIN & V.K OHRI, Introduction to Economics

REFERENCES

1. www.in.reuters.com/article/businessNews/idINIndia 2. www.google.com


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7166248 Indian Cement Industry

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