Price hikes leave builders planning their own cement plants

As a result of steadily increasing cement prices, the Builder’s Association of India has announced plans to construct four or five cement plants across India over the next three years, with the aim of producing cement at Rs.150 – 160 per 50 kg bag for its members. Currently cement prices in India range between Rs.250 – 300 per 50 kg bag.

The Association’s president, Bhagwan J Deokar said recently, “The cement companies have cut production to increase cement prices. We are planning to set up our own cement plants to resolve the problem of cartelisation and persistent price hikes by cement.” Setting up these new plants is expected to cost around Rs.2250 crore, and they will have a capacity of 5 million tpa. The BAI says it is looking at Andhra Pradesh, Rajasthan and Gujarat as sites for the proposed units.

The funding for the plants is set out as a ratio of 25% equity and 75% debt. B Seenaiah, a senior member of BAI said "We plan to raise Rs.500 crore each as equity from various companies involved in construction and infrastructure, and [receive the remaining] Rs.1750 crore from banks and financial institutions…The proposed cement company will be run by professionals," he added.

However, critics are concerned that these plans are too utopian to be realised. Vineeta Singhania, the managing director at J K Lakshmi Cement said, “to set up a 1 million tpa cement plant costs around Rs.5500 crore. The cost of production of cement per 50 kg bag is over Rs.200. If the BAI is able to offer cement at Rs.150 – 160 kg per bag then cement companies will come and learn from them.” Analysts at Anand Rathi Securities support this view and call the BAI’s ambitions “difficult.”

Problems stem from the rises in excise duty and production costs. Cement manufacturers in India are facing pressure due to oversupply, and one expert from Ambit Capital has deemed the BAI’s plan to add to this supply a nonviable option.

The BAI also noted a recent parliamentary panel had urged the government to undertake an independent study on cartelisation in the cement industry, with adequate penalties for parties found guilty.

Read the article online at: https://www.worldcement.com/asia-pacific-rim/04042011/price_hikes_leave_builders_planning_their_own_cement_plants/