MANAGERIAL ECONOMICS PROJECT

DEMAND FOR CEMENT IN INDIA

Submitted to
Prof H. Panda

By
Section B Group 6

Sanil Badhani (PGP32091)

Rahul Rawat (PGP32092)
Ankit Kumar Daluka (PGP32093)
Shubham Goyal (PGP32094)
Nidhi Dahiwale (PGP32095)
Ashish Brijwani (PGP32096)
Mukul Jha (PGP32097)
Bharath Goud (PGP32098)
Saloni Agrawal (PGP32099)
Amit Kumar (PGP32100)

Introduction
Cement is the ingredient that does the act of holding the concrete together, and is thus critical
for fulfilling society's needs of housing and other basic infrastructure such as buildings,
bridges, roads, schools and hospitals and water treatment facilities. Concrete happens to be
the second most consumed material on earth after water, with nearly three tones used every
year for each person on this planet.
Being one of the very basic elements for setting up of strong and healthy infrastructure,
Cement plays a very crucial role in the economic development of any country. Having a
history of more than hundred and fifty years, it has been used quite extensively in
construction of anything, from a very small building to a giant and mammoth multi-purpose
project.

Evolution of domestic cement industry

With a capacity of about 400 million tons as of 2014-15, India is also the world's second
largest cement producer. However, it has been a pretty gradual shift since setting up the very
first plant in Porbandar, Gujarat around 1914. The evolution of cement industry can be split
into three main distinct periods (also see charts below):
1. Total government control (till 1982)
2. Partial decontrol (1982 - 1989)
3. Total decontrol (after 1989)
Total government control (1942 to1982)
In this phase, as the Indian Government exercised strict control by fixing the production
limits, prices and distribution channels. To ensure the fair prices for the consumers and
commensurate proper remuneration for producers across the whole country.
The price that was being set was based on cost of production of cement throughout the whole
country plus a small marginal profit. If the actual freight cost for a manufacturer was lower
than the component in the uniform price, producers had to pass on the differential amount to
a pool Vice-versa, the producers were reimbursed the difference.
This freight pooling system encouraged producers to set up cement plants across the country,
easing its earlier concentration in eastern India, where raw material supply was abundant.
However, producers lacked decent incentives to minimize costs, which led to increase in both
the average cost of production and the demand for scarce railway capacity.

Key events

Source: CRISIL Research

Partial government decontrol (1982 to1989)

Recognizing the uniform price system's inefficiencies, the Indian government introduced a
system in 1982 of partial decontrol. While the existing producers had to sell out 66.4 per cent
of their original produce to the government at the ceiling price, new and sick units have had
to sell half of their output. The balance remaining could be sold in the open market. While the
producers managed to earn a stable profit on the levy sale to the Indian government, gains
from open market sales expectedly decreased, as the market supply increased, which
heightened the competition. Thus, the Indian government gradually began to reduce the levy
quota and consequently hiked the retention prices to boost the profitability from open-market
sales.
Key events

Source: CRISIL Research

Total decontrol
In 1989, the Indian government completely removed price and the distribution controls. A
subsidy scheme put in replaced the freight pooling system in order to ensure availability of
cement at a reasonable prices even in remote regions. This opened up many opportunities for
the industry and was hence marked by huge investments.
Key events

Source: CRISIL Research

Key Statistics
1) Major Inputs
The cement industry happens to be a highly energy intensive sector. Energy and the raw
materials (coal and lime stone) together form the most significant component in the
production of cement. The array of input costs that primarily control the price of cement are
basically coal, electricity tariffs, freight and railway transport, royalty and cess(tax) on
limestone. However, interestingly, the government controls the prices of all these
components.

2) Firm performance
The performance of cement industry is directly linked with the performance of the nations
economy. A robust economy coupled with booming construction activities ensures a higher
cement consumption. The same is also true for the Indian cement industry. A look at Figure
below shows that Indias GDP growth and the growth in the Profit After Tax (PAT) of Indias
Cement industry also closely follow each other.

3) Industry Structure
With a capacity of around 397 million tons as of 2014-15, India is also the world's second
largest cement producer.The structure of the industry can be viewed as clearly fragmented,
although the concentration at the very top has increased, as the top 10 big players control
around 78% of the market share. The top 5 players account for nearly 45-50% of the cement
industry's capacity. Total installed cement capacity present in India stood at 413 million tons,
as of March 2016.

UltraTech Cement Ltd

Jaiprakash Associates Ltd

Birla Corporation Ltd

Top 10 major players in Cement Industry

ACC Ltd

Ambuja Cements Ltd

7.0; 3%
7.6; 4%
46.2; 22% 43.9; 21%
7.7;
Century Textiles
& 4%
Industries Ltd 24.2;
India
Cements Ltd
12%
8.6; 4%
22.1; 11%
9.6; 5%
15.9; 8%
Dalmia Bharat Ltd
12.8; 6% Others

Shree Cement Ltd

The Ramco Cements Limited

Source: Crisil reports

Region-wise installed capacity 2015-16

Source: CRISIL Research

4) Porters five force analysis

A very high level of competition in the cement industry is a direct result of the low entry
barriers and the easy availability of technology.

Source: CRISIL Research

Demand Dynamics for Cement Industry in India

Any demand for cement stems either from repair work of present structures or new
construction work. The demand for cement in India has grown at a moderate rate with
Compounded Annual Growth Rate of around 4%, which can be majorly attributed to
construction of industrial and infrastructural projects, along with modest demand in the
housing and commercial sector.
The demand for cement in India can be majorly attributed to four major sectors, Households,
Industrial Demand, Infrastructural Demand and Commercial Demand.

Major
Sectors

Household

Infrastructu
ral

Housing:
The housing sector is the major

Industrial

Sector

% Share in

Household

Demand
64

Industrial

17

Commercial

13

Infrastructural

Commercia
l

demand driver in India

for cement, accounting for more than 60% of the total annual demand. There are three main
factors that contributes the demand for cement in Housing Sector, which are1. Per capita income of the consumers in both rural and urban setups
2. Government outlay to major housing projects in Annual budgets and otherwise
3. Ease of financial access to the consumers, especially for people in low and medium
income levels

There are some major periods in recent past which makes for interesting analysis of demand
in Housing Sector for Cement in India. Prior to the global economic slowdown, which also
had a great deal of impact on Indian Economy, the urban housing market in India witnessed a
boom, based strongly on the back of rise in income levels, and tremendous employment
opportunities created by the revolution in Information Technology (IT) sector and the
growing trend of nuclear families across India.
Although, after the economic slowdown in 2009-2010, the demand grew at a meagre 1%
CAGR, during the previous 5 years. As far as rural housing is concerned, the demand in last 5
years has been driven by government-supported schemes and simultaneous increase in rural
income. A vibrant growth in rural wages has resulted in building of larger and pucca houses.
Since penetration of pucca houses in India is still low at around 50-55% as in 2012, the
demand for pucca houses is expected to grow at a healthy pace in the coming years as well.

Infrastructure:
The demand for cement for infrastructural sector has seen the most tremendous growth cross
all sectors in India, accounting for more than one-fifth of the total cement demand in India,
which has boosted overall percentage of demand share for cement market to a promising
17%, up from 10% not so long ago. Over the next few years also, the spending on urban
infrastructure project as well as on irrigation are likely to play the role of major demand
drivers for cement in this sector. Besides, the major boost being targeted to infrastructural
sector in a bid to make India a manufacturing hub under the alias of Make in India makes
Infrastructure sector one of the most promising sector for Cement Demand in India.

Infrastructure Spending in India

10

Commercial Sector
According to the cement demand and construction activities it involves, the Commercial
Sector can be classified into Office Spaces, Hotels, Malls and Multiplexes and other civil
structures such as hospitals and educational institutes. Of the overall demand from
Commercial Sector, demand for Office Space accounts for the biggest portion. However, over
the medium term, the demand for cement from the segment of commercial construction
segment is still expected to be muted, owing to the significant construction work in the recent
past coupled with weak demand for the office and retail spaces due to slow economic growth.

11

Income Elasticity of Cement

Major
Sectors

Household

Infrastructu
ral

Industrial

Commercial

Income Elasticity is calculated as per the below formula

Income Elasticity =

%Change demand
%Changeincome

For the calculation of the Income elasticity, GDP is used to find out the % change in income.

Analysis of Income Elasticity individually according to the Sector.

12

Industrial Elasticity
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5
-10

13

Commercial Elasticity
15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5
-10

Income Elasticity across Sectors- a comparative analysis

50

Total Elasticity

Household Elasticity

Infrastructure Elasticity
Commercial Elasticty
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Industrial Elasticity
-50

Elasticity for 8 years plotted on the graph for the analysis to understand the effect of the main
event during that year on the income elasticity of the cement demand. As we can see
fluctuation in the income elasticity of cement demand during the period, so following are the
results of the analysis
1. In 2008, great recession of 21st century happened due to which global economy was
badly hit and markets dropped to the lowest which created a negative feeling in all the
sectors and resulted indirectly in drop of cement demand in India.
2. 6th pay commission was passed in 2006 and payment was done in 2008 to the
government employee which increased the salary but put the financial burden on the
government.
3. In 2012, RBI reduced the repo rate for the first time in last 3 years by 0.50 bps which
gave the positive outlook.

14

Retail Price Index

(RPI)

Wholesale Price
Index (WPI)

Price Elasticity of Cement

Major
Sectors
Infrastructu
ral

Household

Retail Price Index

(RPI)

Industrial
and
Commercial

Wholesale Price Index

(WPI)

Analysis of Income Elasticity individually according to the Sector.

Price Elasticity of Cement

6
5
4
3
2
1
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

15

Household Price Elasticity

5
4
3
2
1
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-1
-2

Infrastructure Price Elasticity

5
4
3
2
1
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-1
-2

Commercial and Industrial Price Elasticity

15
10
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-5
-10
-15
-20

16

Price Elasticity across Sectors, a comparative Analysis

50
40

Total Price Elasticity

30
20
10

Household Price Elasticity

Infrastructure Price Elasticity

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
-10

Commercial and Industrial Price Elasticity

-20
The cement is not as sensitive to a change in income as it is to change in
price of the cement. This happens due to a combination of two very
important reasons:1. Even after a slowdown occurs, companies take some finite time to
adjust their prices accordingly, and since a lot of stock is already
present in the Stock Keeping Units (SKUs) and with other
distributors having the cement with older price label, It takes time
before the stocks having new price can be fully available to
customer to buy.
2. The Income elasticity is more sensitive as Income can be modified
very quickly, like just after a new pay commission, and thus would
immediately effect the purchasing power of the consumer in the
short run as well. Thus any change in Income results in very
immediate change in purchasing behaviour of the consumers.
The sharp jump in price elasticity for cement in Infrastructure sector
during 2013 is due to the fact that there was a slight slowdown as
17

compared to some sort of recovery after the major economic slowdown

of 2008-09 and due to the fact that General Elections were bound in
India in 2014, which invariably lead the present government to speed
up pending infrastructural developmental projects. In 2014, after the
elections were over, the elasticity rebounded to its more normal state
of equilibrium.

FACTORS AFFECTING DEMAND IN INDIA

With CAGR of 8.42% from FY 2009-10 to FY 2014-15 the cement industry has been
growing year on year due to ongoing increase in domestic demand from public and private
projects in real estate and infrastructure. India holds 2nd position after China in the production
of cement. The cement production in India is approximately 280 million tonne in FY 201415. After India USA, Iran, Turkey and Brazil are the leading producers

CEMENT PRICING

18

In general, the price of Grey cement is less than

price of White cement as the production of white cement
requires a special cooling technique which substantially
increases the price. The demand of real estate and
construction industries is directly correlated with the
price of cement.

It has always been observed that if the

Government spend on infrastructure projects increases
then it pushes the demand of cement and impacts the
price of slag cement. Once the Minister of Railways
proposed increases in cement freight and also its raw
materials it immediately increased the pries of one tonne
of cement by INR 40-60

INFRASTRUCTURE DEVELOPMENT

Cement is the primary raw material required in infrastructure & construction

industries and these are also the largest consumers of cement. Hence these two industries act
19

as major demand drivers for cement. Real estate is the major consumer of cement with 64%
which is then followed by infrastructure with 16%. Industrial and commercial construction
account for the remaining with 11% & 9%. From FY 2009-10 to FY 2014-15 the real estate
sector in India has grown at CAGR of 13.75% which is expected to grow in the coming
fiscals. With the announcement to construct cement roads the demand is further expected to
increase in the coming few days

TECHNOLOGICAL ADVANCEMENTS
Being the second largest cement producer India has a distinction of production plants
with varying capacities and technologies. The industry depended on production of cement by
wet process by 97% in 1951 and it decreased to 1 % in 2015 replacing with an efficient dry
process. The major technological advancements during the 1980-90 have had a significant
transformation of production process around the globe.
Using Electro static precipitators and high efficiency dust collection systems which
are environmentally friendly has positive impact on the image on the company and also
increasing the profits. There has been an exponential decrease in the costs with production
through OPC method. In the future using well tried and proven materials will decrease in
lower clinker factor than the present situation. The research has not scaled yet and once its
done to a scalable extent it can substitute todays cement in a meaningful amount

GOVERNMENT POLICIES
During the financial year 2014-15 the excise duty on cement production was at 12%
and it has remained constant at the same rate from FY2011-12. The excise cess of 3% has
also remained stable from FY2011-12. For imports the basic custom duty in FY2014-15 IS
AT 10%. The additional countervailing duties is at 12.50%, the custom cess is imposed at 3%
and special Counter Vailing Duties is at 4%. Even though the customs duty and special
Counter Vailing Duties has remained stable from past 3 years the additional Counter Vailing
Duties has been raised to 12.5 from 12% in FY2014-15.

20

INITIATIVES BY GOVERNMENT
The State Government have played a crucial role in promoting demand for cement in the
country. Several initiatives and subsidy at the state level have ensured that investments
continue to flow in the industry. Some of the initiatives are:

The Government of Tamil Nadu has released a low priced cement brand called
Amma cement at INR 190.

Government of Andhra Pradesh has proposed for INR 92 Billion to set up three
manufacturing plants with production capacity of 12 Million tonnes.

In addition to this the GOI has permitted Foreign Direct Investment up to 100% which
have increased investments up to INR 133 Billion in between FY 2000-01 and FY201415

DEMAND FORECASTING
21

Time Series Forecasting:

The annual demand shows a fairly linear trend over time. Taking time as a dependent variable
and finding the trend for demand, we get:

Demand = 15.82 * Time + 111.85

Using this equation to forecast ahead, we get the projected growth of FY16 is 5.86% and
overall CAGR of 5.4% for FY19.

Actual Vs Predicted Demand for Cement for the Last Decade

Demand in MT

350.0
333.42
317.59
301.77
300.0 285.94
280.0
248.7
250.0
238.1
223.2
198.0
200.0
185.0
180.0
161.5
147.8
150.0
126.7
100.0
50.0
Year

Demand for Cement

Predicted
Forecasts

22

TIME SERIES DEMAND FORECASTING: DATA

The simple time series forecasting by plotting a linear trend shows surprisingly accurate
results. Overall, we see only a 2% error rate in our projections.

EFFECT OF MACROECONOMIC FACTORS ON DEMAND

23

Population Vs Demand

Population(LOG)

2.1

2.2

2.3

2.4

2.5

Demand for Cement (LOG)

24

Urbanization Index Vs Demand

2.12
2.1
2.08
2.06
2.04
2.02
2
1.98
1.96

Urbanization Index(LOG)

2.1

2.2

2.3

2.4

2.5

Demand for Cement (LOG)

Cement price Index Vs Demand

2.5
2.4
2.3
2.2
Cement Price (LOG) 2.1
2
1.9
1.8

2.1

2.2

2.3

2.4

2.5

Demand for Cement (LOG)

25

GDP Vs Demand
3.4
3.3
3.2
GDP (LOG) 3.1
3
2.9
2.8
2.05 2.1 2.15 2.2 2.25 2.3 2.35 2.4 2.45 2.5
Demand for Cement (LOG)

India Infra Output Index vs Demand

2.3
2.25
2.2
2.15
2.1
2.05
2
1.95
1.9
2.05

2.1

2.15

2.2

2.25

2.3

2.35

2.4

2.45

2.5

26

The results of the regression are highly skewed. The correlation between all the independent
variables, limitations of data and possible stationarity issues currently put this analysis out of
the scope of this study. The linear trend showcased by the demand in the past ten years
though allows us to draw some conclusion in terms of the projections for the next 4 years.

Technological progress in construction and demand for cement in India

Over the past 10 years the changes in technology in the construction sector have been largely
evolutionary. However, there is still a high potential for significant improvement that could

27

change the very basic nature of construction. Most of the changes introduced in the sector are
global in nature driven by the competitive pressure and continuous technological innovation.
Innovations in Construction Technology: Various innovations in the construction technology has led to complete change in the new and
old construction methods. The use of latest machinery has resulted in usage of prepared
building parts such as pillars, roofs and concrete blocks which in turn has resulted in speedy
completion of projects. The use of pre-stressed beams and concrete tendons provided
additional strength to the construction.
Green Construction: The industry is gradually moving towards sustainable development. This means most of the
structures are constructed in a way such that natural environment is not spoiled and the
materials used are eco-friendly.
LEED: One of the most recent technological improvement in construction technology is LEED
(Leadership in Energy and Environment Design). It assures the quality of construction and
checks that the structure is eco-friendly. It also checks that the structure is of the design
having lowest energy consumption and emphasizes maximum utilization of renewable
sources of energy.
Hercules Single Strand Tensioning System: This technology is mostly used in the construction of major structures such as bridges which
require extra strength and durability. This is one of the major advancement in the sector
utilizing minimum amount labour, reducing completion period of the project and provides
increased strength and robustness. In the early system concrete was cables were drawn
manually and then concrete was poured to enhance the sturdiness by using massive labour. In
spite of all this quality maintenance was big issue. It also increases the cost of project that
sometimes goes beyond the expectations. Hercules Single Strand Stressing System provides a
suitable solution for many such problems in huge projects for the strength of infrastructure.
Use of modern technology and machinery guarantees the quality assurance of the project [1].
The use of hydraulic jacks and chucks which help in dispensing the tension cable swifter also
lead to increased strength in the structure and timely completion of project.

28

Styrofoam Panels: It is one of the recent advancement in the sector used in the creation of heat controlled homes.
The strength and durability of Styrofoam makes the structure long lasting and has enabled
construction sector to design comfortable homes for housing and business.

Un-bonded PT slabs: The use of Un-bonded PT slabs in the industry has considerable increased in the recent years
due to its affordability and reliability for quality and strength in the structure. They are light
weight and flexible due to the small thickness of the un-bonded tendon. It can be successfully
used at various places such as roofs, pavements and round water tanks.
Solid Cement Bricks: Cement bricks industry is considered one of the biggest natural resource consumers.
However, it may be used as a potential place for recycling wastes, because of its composite
nature (i.e., cement, water and aggregates). Aggregates in solid cement bricks comprise about
6075% of the total volume, so any reduction in natural aggregates consumption will have
significant impacts [2]. The compressive strength of solid cement bricks is proportional to its
unit weight; the higher the unit weight, the higher the compressive strength.

In the past years the greatest impact in this sector has come from the improved management
and automation methods. These methods have led to improvement in the productivity and
schedule performance. The construction design has also seen sophistication in conceptual
phase and real time data base communications network to support estimating, scheduling and
project management [3].
29

The reduction in the size of cement molecules has also been one of the major impacting
factor in the construction industry as large particles are deleterious and thus rendering the mix
difficult to burn. Cement particles react with water at their surface. The outer layers of a
cement particle react, and are replaced with a somewhat thicker layer of hydrate. This is
exemplified by the progress of reaction of a spherical particle of 14 m diameter [6].

Inferences:-

Price
Supply
Supply
26
21

Demand
Demand
Quantity (in

248.

28

Inference:

Compared to 2014, we can see that both demand and supply curves have shifted outside in
2015. The shift in supply curve is on account of better technology which results in lower
production cost. Subsequently, producers try to push in more product to the market, leading
to greater supply. At the same time, the demand for cement has been generally rising due to
construction requirements, thereby raising demand. Hence, there is an outward movement in

30

both supply and demand curves. Therefore, quantity demanded and supplied is bound to rise.
In this particular case, there is also an increase in price of cement.

Conclusion:
A slow growth for the housing sector and delayed spending from the government sponsored
projects has led to the fall in the demand for cement in the beginning of 2015-16. The only
respite shown from the demand from the infrastructure segment. According to a research, the
next 5 years the projection for cement demand growth is at 7.0-7.5% CAGR, led by an inflow
from government projects and rapid rise in infrastructure spending. Ultratech Cement, ACC
and Ambuja Cements, the three biggest cement producers of the country, are also expecting
the remaining year to show positive trends in the demand for cement. The companies are
projecting a 6-8% growth demand this year. The main reason again being an expected
increase in demand from the government investments.
The Indian cement industry has solid base and consistently produces quality cement that
meets the worldwide standards. It has made a huge progress in technology upgradation and
adoption of most recent innovation and will be keeping on doing so. There is also great scope
for expansion in exports of cement. Also, the difference between cement demand and supply
has decreased to some degree and the segment is bound to witness higher growth in the
coming years. This shows the industry has a critical part to play in the economy. Because of
the increasing spend in the housing sector, demand from across the world and expansion of
state and national highway projects, there exists abundant investment opportunities in the
business. Interests from global cement companies and possible mergers and acquisition lay a
way for interesting developments in the industry.

31

References: -

1.
2.
3.
4.
5.
6.
7.

http://www.understandconstruction.com/construction-technology.html
http://www.sciencedirect.com/science/article/pii/S209012321100097X
http://www.nap.edu/read/1101/chapter/9#76
http://ciks.cbt.nist.gov/bentz/finetwo/paper2col.html
https://en.wikipedia.org/wiki/Cement
http://www.cementkilns.co.uk/grinding.html
http://www.tandfonline.com/doi/abs/10.1080/09537325.2013.774343

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