Assignment-3 How cement cost affected by the transportation cost?

by

Debasish Deb 2007JEN2820

Centre for Energy Studies Indian Institute of Technology Delhi Hauz Khas, New Delhi 110016 (INDIA)

CONTENTS
CONTENTS............................................................................................................................2 INTRODUCTION..................................................................................................................3 CEMENT TRANSPORTATION IN INDIA........................................................................4 INDIAN CEMENT INDUSTRY STRUCTURE.................................................................6 CEMENT PRICE IN INDIA................................................................................................7 CONCLUSION.....................................................................................................................11 REFERENCES.....................................................................................................................12

INTRODUCTION
The Indian Cement Industry today is the second largest in capacity and production after China. The Indian Industry charted a fast track growth of around 10% per year on an average during the last decade in spite of global economic recession and melt down of Asian economy. Along-with the growth in capacity and production, the Industry also kept pace with rapid modernization and technology up-gradation taking place in developed countries. This is notwithstanding the fact that the Industry faces several bottlenecks in high cost of inputs like fuel and power, high taxes and duties and transportation cost. More than 70% of the input cost in cement manufacture is beyond the control of the industry and is administered by regulatory authorities. These include royalties and cess on limestone, tariff for coal, rail transport and power, duties on finished goods, namely, central excise, local sales tax, octroi, etc. The only areas where industry can induce cost controls and economy are reduction in consumption of inputs like fuel and power through energy efficiency, improved productivity through planned maintenance and reduction of stoppages, etc. The continuous efforts by the industry in these areas have brought in good results. It is noteworthy that the energy consumption by the most efficient cement plants in India at the level of 665 Kcal per kg. of clinker and 69 kWh per tonne of cement are comparable with the best achieved in the world. The Pollution Control and environmental performance of the Industry is commendable, the state-of-art plants achieved emission level of below 25 mg/Nm3. Most plants take it as a challenge to grow and nurture rose gardens under the kiln stack to show their environmental protection capabilities and competence.

CEMENT TRANSPORTATION IN INDIA

The consistent growth of the infrastructure and housing sectors has increased the demand for cement, bringing cheer to the cement transportation market. Apart from the influx of more global cement manufacturers, the cement transportation market will also benefit from favorable government initiatives related to various infrastructure projects and urban development, which can revive the housing sector also. New analysis from Frost & Sullivan (www.automotive.frost.com), Strategic Analysis of Cement Transportation Market in India, finds that the industry dispatched 167.7 million tons of cement in 2008 and is expected to dispatch 263.8 million tons in 2014. As cement is a high-bulk, low-value, freight-intensive commodity, transporting it over distances more than 400km becomes commercially unviable. This has resulted in regional cement participants serving regional markets. While inland waterways account for only a minor percentage of domestic cement transport, road is the main mode of transport, though rail is the preferred mode for most companies because it is the cheapest, fastest (for long distances), and safest mode of transport for cement. The southern region, with its large limestone reserves, has significant overcapacity, resulting in considerable net dispatches from the south to the west in 2008. Meanwhile, the northern region dispatched about 4612 thousand tons of cement to central region and 2515 thousand tons of cement to western region during the same year. Disruptions in supply and transportation of finished goods and raw materials could affect the business of the Company. The production of cement is dependent on a steady supply of various raw materials. Cement is transported to the customers by both road and rail. Transport of the inputs and finished products is subject to various bottlenecks and other hazards beyond the control of the company. An increase in the price of transportation or interruptions in transportation of the inputs or finished products could have an adverse effect on the business, financial condition and results of operations. Transportation strikes by members of various Indian truckers unions have had in the past, and could have in the future, an adverse effect on the receipt of supplies and delivery of the products by the Company. In addition, cement is a perishable product as its quality deteriorates upon contact with moisture over a period of time. Therefore, prolonged storage or exposure to

moisture during transport may result in such cement stocks being written off. Due to the significant impact of transportation costs on overall costs, cement manufacturing and sale in India is largely regional in nature.

Figure 1 Flow chart of cement distribution

INDIAN CEMENT INDUSTRY STRUCTURE

The cement industry in India is estimated at 125 million tonnes (2004-05) by volume. The domestic cement industry is highly fragmented, with over 50 cement players and more than 120 manufacturing plants. This apart, the industry is highly regionalized, as cement units are concentrated in clusters, close to the limestone deposits. Competition is also regionalized since the low-value of the commodity makes transportation over long distances uneconomical. Like in most commodity industries, the business cycle in the cement industry follows a set pattern. When the demand-supply gap narrows, price realizations improve and companies increase their capex outlays for building capacities and increasing their market shares. As capacities start bunching up, overcapacity starts creeping-in and player profitability deteriorates. This constraints further capacity additions, which results in lower capex outlays and, over a period of time, helps in improving the business scenario. Most of the large companies with high level of financial flexibility are the first to take off in good times as they are continuously looking at improving their market share.

Figure 2 Cement business cycle

CEMENT PRICE IN INDIA

The cement prices in the target region are increasing gradually in line with the rise of cement prices across the country. Prices are primarily driven by the prices of mainland players, who incur high freight cost in supplying to the target region. The movement of cement prices since April 2008 and the region-wise seasonal price trends have been illustrated below.

Figure 3 variation of Cement prices in different region

The transportation of cement is usually by both rail and road. Also, freight is the key component in cement distribution and pricing. Primary freight (freight from cement plant to cement depot/ warehouse in the desired market) for main land players has been estimated based on rail distances from each cement plant to each district in the target region. In the case of grinding units, clinker freight from clinkerization units to grinding units has also been considered. Freight from railway siding to the depot or dealer warehouse has also been added to compute primary freight. Primary freight varies from Rs 55 - 90 per bag for a main land player. However, the local players including mini plants are supplying by road and their freight varies from Rs 10 - 40 per bag. Secondary freight i.e. from dealer to retailer in the target region is around Rs 2-3 per bag.

Figure 4 Cost breakup

FREIGHT CHARGES FOR CEMENT IN INDIA

6000 5000
Road

4000 Rs./Ton Rail 3000 2000 1000 0 0 500 1000 1500 2000 2500 3000 3500 4000 Distance in km
Rail
Sea

Road Sea

Figure 5 Freight charges for transportation of cement in India

Currently, freight charges are about Rs 1.5 per tonne per km, with an average of about 450500 km for a company. The cement industry transports approximately 60% of its products by road. Freight costs account for about 18-20% of the operating costs of cement companies. The cost of transportation through sea is one-third that of the road transport. The average freight cost by sea comes to around 50-70 paise per tonne km against Rs1.5 per tonne km for road transportation
Table 1 Freight charges for transportation of cement in India
DISTANCE km 0 10 20 30 40 50 60 70 80 90 100 110 120 130 Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 0 116.8 116.8 116.8 116.8 116.8 116.8 116.8 116.8 116.8 116.8 125.6 134.1 142.5 0 15 30 45 60 75 90 105 120 135 150 165 180 195 0 7 14 21 28 35 42 49 56 63 70 77 84 91 DISTANCE km 1175 1200 1225 1250 1275 1300 1325 1350 1375 1400 1425 1450 1475 1500 Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 1036.7 1057.8 1079 1100.1 1121.3 1142.4 1163.6 1184.7 1205.7 1226.7 1247.7 1268.7 1289.7 1310.7 1762.5 1800 1837.5 1875 1912.5 1950 1987.5 2025 2062.5 2100 2137.5 2175 2212.5 2250 822.5 840 857.5 875 892.5 910 927.5 945 962.5 980 997.5 1015 1032.5 1050

DISTANCE km 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 320 330 340 350 360 370 380 390 400 410 420 430 440 450 460 470 480 490 500 510 520 530 540 550 560 570 580 590 600 610 620 630 640 650 660 670

Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 150.8 158.9 166.9 174.7 182.4 190 197.5 205.4 213.2 220.9 228.6 236.2 244.2 252 259.8 267.7 275.4 283.1 290.8 298.5 306 313.6 321.4 329.3 337.1 345 352.8 360.8 368.8 376.6 384.4 392.3 400.1 408 415.8 423.6 462.3 471 479.7 488.4 497.1 505.8 514.5 523.2 531.9 540.5 549 557.6 566.1 574.7 583.2 591.8 600.3 608.9 210 225 240 255 270 285 300 315 330 345 360 375 390 405 420 435 450 465 480 495 510 525 540 555 570 585 600 615 630 645 660 675 690 705 720 735 750 765 780 795 810 825 840 855 870 885 900 915 930 945 960 975 990 1005 98 105 112 119 126 133 140 147 154 161 168 175 182 189 196 203 210 217 224 231 238 245 252 259 266 273 280 287 294 301 308 315 322 329 336 343 350 357 364 371 378 385 392 399 406 413 420 427 434 441 448 455 462 469

DISTANCE km 1525 1550 1575 1600 1625 1650 1675 1700 1725 1750 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 2025 2050 2075 2100 2125 2150 2175 2200 2225 2250 2275 2300 2325 2350 2375 2400 2425 2450 2475 2500 2525 2550 2575 2600 2625 2650 2675 2700 2725 2750 2775 2800 2825 2850

Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 1329.9 1349.1 1368.3 1387.4 1406.4 1425.5 1444.5 1463.4 1481.6 1499.6 1517.6 1535.6 1549.4 1563.2 1577 1590.6 1604.3 1617.8 1631.3 1644.6 1656.3 1668 1679.6 1691.1 1702.7 1714.1 1725.5 1736.7 1748 1759.2 1770.3 1781.4 1792.5 1803.5 1814.4 1825.4 1836.2 1847 1857.8 1868.4 1880.6 1892.7 1904.7 1916.7 1928.7 1940.7 1952.6 1964.4 1976.3 1988.1 1999.8 2011.5 2023.2 2034.9 2287.5 2325 2362.5 2400 2437.5 2475 2512.5 2550 2587.5 2625 2662.5 2700 2737.5 2775 2812.5 2850 2887.5 2925 2962.5 3000 3037.5 3075 3112.5 3150 3187.5 3225 3262.5 3300 3337.5 3375 3412.5 3450 3487.5 3525 3562.5 3600 3637.5 3675 3712.5 3750 3787.5 3825 3862.5 3900 3937.5 3975 4012.5 4050 4087.5 4125 4162.5 4200 4237.5 4275 1067.5 1085 1102.5 1120 1137.5 1155 1172.5 1190 1207.5 1225 1242.5 1260 1277.5 1295 1312.5 1330 1347.5 1365 1382.5 1400 1417.5 1435 1452.5 1470 1487.5 1505 1522.5 1540 1557.5 1575 1592.5 1610 1627.5 1645 1662.5 1680 1697.5 1715 1732.5 1750 1767.5 1785 1802.5 1820 1837.5 1855 1872.5 1890 1907.5 1925 1942.5 1960 1977.5 1995

DISTANCE km 680 690 700 710 720 730 740 750 760 770 780 790 800 825 850 875 900 925 950 975 1000 1050 1075 1100 1125 1150

Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 617.4 626 634.5 643.1 651.6 660.2 668.7 677.3 685.8 694.4 702.9 711.3 719.7 740.9 762 783 804 825 846 867 887.9 930.5 951.8 973.1 994.4 1015.5 1020 1035 1050 1065 1080 1095 1110 1125 1140 1155 1170 1185 1200 1237.5 1275 1312.5 1350 1387.5 1425 1462.5 1500 1575 1612.5 1650 1687.5 1725 476 483 490 497 504 511 518 525 532 539 546 553 560 577.5 595 612.5 630 647.5 665 682.5 700 735 752.5 770 787.5 805

DISTANCE km 2875 2900 2925 2950 2975 3000 3025 3050 3075 3100 3125 3150 3175 3200 3225 3250 3275 3300 3325 3350 3375 3400 3425 3450 3475 3500

Cement Transportation cost Rail Road Sea Rs/Ton Rs/Ton Rs/Ton 2046.5 2058 2069.6 2081.1 2092.5 2103.9 2115.3 2126.7 2138.1 2149.4 2160.6 2171.9 2183.1 2194.2 2205.3 2216.4 2227.5 2238.6 2249.6 2260.5 2271.5 2282.4 2293.4 2304.3 2315.1 2325.9 4312.5 4350 4387.5 4425 4462.5 4500 4537.5 4575 4612.5 4650 4687.5 4725 4762.5 4800 4837.5 4875 4912.5 4950 4987.5 5025 5062.5 5100 5137.5 5175 5212.5 5250 2012.5 2030 2047.5 2065 2082.5 2100 2117.5 2135 2152.5 2170 2187.5 2205 2222.5 2240 2257.5 2275 2292.5 2310 2327.5 2345 2362.5 2380 2397.5 2415 2432.5 2450

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CONCLUSION
1. High Transportation Cost is affecting the competitiveness of the cement industry. Freight accounts for 17% of the production cost. Road is the preferred mode for transportation for distances less than 250km. However, industry is heavily dependant on roads for longer distances too as the railway infrastructure is not adequate. Despite higher cost, road transport offers unmatched ease of delivery 2. There is regional imbalance in the distribution of cement industry. Limestone availability in pockets has led to uneven capacity additions. 3. In developed countries, cement, food grains, fertilizers etc. are transported in bulk. There is an increasing trend for bulk movement of such commodities in our country due to reduction in the transportation cost of bulk movement. Around the world, almost 80 per cent of the cement transportation is carried out in the bulk form. But in India, only 1 per cent of total cement is transported in this form. This is because of the attendant problem like inadequate infrastructure in the form of port facilities and lack of timely availability of wagons from railways. 4. To overcome increasing freight costs, some of the coast-based companies have started using water transport. Prominent among these are Gujarat Ambuja Cements and India Cements. Though this involves initial capital expenditure on acquiring ships and installing jetties, the operating costs are almost half of road transport. 5. According to Government of India Cement Industry-Mission 200 MT the production of cement is expected to increase from 170 MT to 280 MT by the end of the 11th Plan. Railways receive more than 100 MT traffic every year from the cement industry and targeting a loading of 200 MT from cement industry in 201112.

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REFERENCES
1. www.frost.com, Greater Infrastructure Development in India Boosts the Cement Transportation Market, Finds Frost & Sullivan, 2. Smita Joshi Saha, price hike to hurt cement firms margins further The Financial Express,Mumbai,Jan2009 3. http://www.domainb.com/companies/companies_g/Guj_Ambuja_Cements/20080819_hike_prices.html 4. www.careratings.com/content/ResourceCenter/reports/CementIndustry_WebCont ent.pdf 5.
www.ipogradings.com/research/research-industry-information-report-domesti c-freightcontents.pdf

6. www.energymanagertraining.com/eca2006/Award2006_CD/03Cement/CenturyCe mentBaikunth.pdf 7. www.indianrailways.gov.in/deptts/commercial/frt-rates0607/frt-idx0607.htm

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