'In the long term, India's cement demand will be in double digits'
Undettered by oversupply in the industry, Reliance Cement is planning ahead. Sumit Banerjee, vice-chairman, discusses with Pooja Sarkar the Anil Dhirubhai Ambani Group’s subsidiary plans of adding capacity and scouting for new locations — measures that will pay off once the demand scenario improves in 2013-14. Edited excerpts:
Please elaborate on the progress of your new projects.
We are setting up two plants — one each in Madhya Pradesh and Maharashtra. Each will be of five mt (million tonne) capacity. The physical work at the MP plant has begun; it will start at the Maharashtra one in another six months. They will commence commercial operation by 2013 and end-2014 respectively. Besides, we are setting up a grinding plant at Butibori near Nagpur; that will be connected with our Maharashtra plant. We are bringing the grinding plant early, so as to couple it with the fly ash and power from the next-door sister company, Reliance Power. It will start generation by mid-2012. The Butibori plant will also get commissioned and start kicking supplies in the Vidharbha market by the middle of 2012.
What are your plans regarding investment in West Bengal and other parts?
We have plans of setting up plants in many parts of the country, including West Bengal. We are interested in Bengal, as it is the gateway to the markets of eastern India. Plus, there is a huge infrastructure gap in this area. We expect consumption demand in this region to grow significantly in the near future. We have given our proposal to WBIDC (the state’s industrial development corporation); we are awaiting the government’s approval. It will be a grinding unit, as there are no limestone reserves in the state but fly ash and slag are readily available.
How much money has Reliance Cement expended till date? What are your capex plans? And, are you looking for mergers and acquisitions?
This is a private limited company and the numbers will come in the public domain only when we go for an IPO (initial public offering). However, we have already spent a substantial amount of money -- and are committed in terms of placing of orders and putting up capacities, etc. That would entail much bigger amounts of money for our first two cement plants. We also believe in creating our own new capacities, as one can create according to one’s choice of scale, technology and design, choice of location, etc.
Coal costs are rising and coal linkages are very difficult to get. Are you looking at buying out coal mines?
Coal mines have become as important as limestone mines — and coal is becoming very scarce. Coal linkages are dwindling; so sourcing of coal will be very important for cement companies. Thus, we need to look at acquiring coal mines wherever possible. I am a believer of coal mines in India -- and not internationally. We have one of the largest coal deposits in the world. So, why should we go out looking for it? Yes, the policies of the government are yet to open the sector...what with coal mine nationalisation and the current Coal India monopoly, etc. But all this will be a thing of the past. This year, we are seeing a coal shortage of 156 million tonnes. My own personal take is that in five years, the domestic coal shortage will cross 300 mt if we don’t get our act right.
The cement industry is facing a huge demand-supply mismatch. What is your view?
The demand-supply gap requires deeper analysis. But, overall, I don’t find anything wrong with the present situation. Yes, in some regions there is a supply overhang and in some places there is a demand overhang after the monsoon. I have personally never been worried about a quarter or a month. I always look and also ask people to look at a longer-term scenario. In the longer term, cement demand in India is going to go up, irrespective of the current so-called slowdown situation in the country. Believe me, it will go up in double-digit numbers.
Last year, the growth was around five per cent. This year, too, the growth will be around five per cent for the industry. I can tell you by the end of the next year, all these talks of the slowdown will be a thing of the past and we will all be back to business.
The capacity utilisation in the industry has dropped to 70 per cent levels, what is the way forward for cement manufacturers? Will it sustain at the same levels?
Capacity utilisation is a very complicated number because it is calculated with despatch number for the year in the numerator and whereas in the denominator you have year-end name plate capacity. So you have certain capacities that were commisioned in the last quarter and those didn’t get a chance to completely come in production. Thus, capacity utilisation is in itself somewhat of a misnomer. Yes the utilisation has been lower than what we have achieved earlier, but it will improve by 2013 or 2014. There are two very simple reasons for the same: one, that demand will grow faster and it will not remain at 5 per cent for sure. This is because Indian infrastructure will not deliver if cement demand growth remains at 5 per cent.
The southern market has seen a significant fall in cement consumption as compared to any other parts in the country. Going ahead, do you expect things to change in that market?
These are transient phenomena. Four years ago, the South market was the darling of all cement players because it showed a huge growth. Today, there are various temporary issues affecting that region. I see it as transitory, because you cannot neglect the inherent growth potential of the southern states. Going forward, they are going to make a spectacular comeback. They have had a few quarters of decline, but when they make a comeback they will come with a bang. Lot of pent up low-cost and mid-income housing demand is accumulated. So, once the Telangana turmoil settles down, we expect improvement.
Andhra Pradesh and Karnataka were originally the prime movers of the southern demand; Kerala and Tamil Nadu had played a supporting role. I guess it’s a matter of one year or so when the South’s demand will pick up. Then, again, it will become the centre of attraction for cement players.
Cement business is a long-term play. Unless one is just looking at the share prices on a daily basis, or analysing quarterly profit and loss accounts of cement companies, one need not worry about the supply-demand situation of the cement industry in the short run.If you wish to have a strong cement company in India, you should not aim to be a two-million tonne venture. Instead, the focus must be a wide geographical presence.