Supply chain management in the cement industry Author: Other Contributors: Advisor: Department: Publisher: Issue Date: Agudelo,

Isabel Massachusetts Institute of Technology. Engineering Systems Division. Edgar Blanco. Massachusetts Institute of Technology. Engineering Systems Division. Massachusetts Institute of Technology 2009 Traditionally supply chain management has played an operational role within cement and mineral extraction commodity companies. Recently, cost reduction projects have brought supply chain management into the limelight. In order to clarify the reasons of the evolution of supply chain management and to demonstrate the value of efficient supply chain management within the cement industry, an analysis of the cement supply chain has been carried out using Michael Porter's five forces. In addition, a comparative analysis of the supply chain strategy of the four largest cement companies has been presented, according to Larry Lapide's excellent supply chain framework. Also, a characterization of the current cement supply chain has been done, using the Supply Chain Council's SCOR model processes; plan, source, make, deliver and return. Five authors' various frameworks of supply chain design have been used to gain insight into the general characteristics of the cement supply chain and propose a definitive supply chain strategy. Finally, three case studies from mineral extraction commodity companies have been presented to demonstrate the potential of supply chain management. The study concludes that supply chain management has tremendous potential to add value as a strategic function for companies in these industries. Thesis (M. Eng. in Logistics)--Massachusetts Institute of Technology, Engineering Systems Division, 2009. Includes bibliographical references (leaves 87-89). URI: Keywords: http://hdl.handle.net/1721.1/51643 Engineering Systems Division.

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Is there enough demand to balance the cement supply? Will the projected growth materialise? Or will the cement industry have to take drastic measures to deal with the situation? This report by Yogender Malik presents some insights. Although Indian cement industry is consolidated to a great extent with five leading players control 46% of the installed capacity but the balance capacity is still fragmented. Owning to cements bulky nature, making it freight intensive industry and transporting cement over long distances becomes uneconomical. This has resulted in cement being largely a regional industry. Indian cement industry is divided into five chief regions - north, south, west, east and the central region. The annual cement despatches for 2008-09 recorded a growth of 7.91% at 180.95 tonne, against the figure of 167.68 tonne during 2007-08. India also reported total cement production of 181.35 million tonne during 2008-09 fiscal, up 7.74%
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from 168.31 during 2007-08. While the industry has been already troubled by the rise in input costs, it is under government pressure that restricts it from passing on the increased costs to the consumers. Yes, input costs have come down with imported coal at $70 a tonne against the high of $200 a tonne last year. At present, the cement sector is in a relatively better position than what it was earlier. Cement companies are now looking for more cost cuts as well as increasing efficiencies in anticipation of tough times. Although prices have increased slightly after November due to the sudden demand but the growth rate is nowhere near what the industry had anticipated. A growth rate of more than 11% was expected in the ongoing Five Year Plan but 2008 registered only 8%. Indian cement industry is expected to add around 40 million tonnes of capacity in 2009. However, there have been doubts whether there will be sufficient demand to take in this supply. Given this scenario, it is only natural that cement makers would go for cost cutting measures while also improving operational efficiencies. Many are now also looking at renewable energy sources.

Demand- supply mismatch Given its rickety infrastructure and scores of upcoming projects, some of which in its initial phases and some on the tables of the bureaucrats, waiting approvals, without any doubts, there is a huge demand of cement in this vast country. The capacity expansion by the cement companies was motivated by these ongoing and pipeline projects. The overall capacity increased to 210 million tonnes in FY2008-09 from 151 million tonnes in FY2004-05. That translates into a CAGR of 10% YOY. The average capacity utilisation and cement dispatches both maintained a steady growth. Total dispatches recorded 181 million tonnes during 2008-09 against 141 million tonnes in 2005-06. Most players, large as well as small have expanded their installed capacities in the recent past. There was a capacity addition of 13.51 million tonnes in the last fiscal despite the slowdown. More than 75% of this (9.85 million tonnes) came through Greenfield projects. The remaining 3.66 million tonnes came through

Brownfield projects. South India witnessed three Greenfield projects by the Madras cement, Chettinad Cement and Rain Commodities. Each has a capacity of two million tonnes. Note that consumption in this region was at 54.3 million tonnes in the previous FY. This is highest amongst all the four regions in the country.

The Expansions Against all odds, the Indian cement industry went on a binge of expansions counting on the huge infrastructure projects. Incidentally, the industry is likely to add about 55-60 million tonnes of capacity in the next couple of years. Most of the big players would be adding capacity under their capital expenditure programmes. [Read the following in this order: Manufacturer, Production (2008-09), Capacity (April 09), Capacity after proposed/ongoing expansion. (All figures in million tonnes)] ACC: 21 - 22.4 - 29.4 Ambuja Cement: 18 - 18.3 - 24.3 Grasim Ind: 16.3 - 18 - 25.5 Ultra-Tech: 15.8 -19.5 - 23 India Cement: 9.1 - 10.7 - 13 Jaypee Group: 8 - 10 - 35 Shree Cement: 7.7 - 9 - 11.5 Century: 7.2 - 7.8 - 11.4 Madras Cement: 6.2 - 7 - 12 Birla Corporation: 5.2 - 5.7 - 10 Compiled from various press releases Jaypee Cement leads the table on the back of its recently announced expansion of 25 million tonnes. Cement biggie ACC plans to add seven million tonnes taking its installed capacity to 29.5 million tonnes by 2011. Ambuja cement, Madras cement and UltraTech cement too are raising their capacity by 7.5, 6 and 5 million tonnes respectively. Greenfield and Brownfield Expansions in 2009 Jan March 2009 Dalmia Cements 2.3mtpa Cuddapah plant. Kesoram 1.7 mtpa cement capacity expansion. India Cements 1.5 mtpa Malkapur, AP plant. Deccan Cements 1.1 mtpa AP plant. JK Lakshmi Cement 0.5 mtpa plant. Madras Cements 2mtpa plant at Ariyalur.

Apr- June 2009 JK Cement 3.5 mtpa Karnataka plant. Orient Cement 1.6 mtpa Devapur, AP plant. Grasims 4.4 mtpa Kotputli expansion. OCLs 2.0 mtpa Orissa plant Chettinad Cement 2mtpa plant at Ariyalur. Murli Industries 2.5mtpa Chandrapur plant. Jul- Sep 2009 Lafarges 1.3 mtpa Sonadih plant to start Dalmia Cements 2.3 mtpa Ariyalur plant to start Zuari Cements 2.4 AP mtpa plant to start Ambuja Cements 1.5mtpa Dadri plant to start ACCs 1.2 mtpa Bargarh plant to start Oct- Dec 2009 JP Associates 3.0 mtpa HP plant to start NCL Industries 1.5 mtpa AP plant to start Raghuram Cement AP 2 mtpa plant to start Andhra Cement 1 mtpa AP plant to start Ambuja Cement 1.5 mtpa Panipat plant to start Shree Cement 1.0 mtpa plant to start ACC 3 mtpa Wadi, Kar plant to start All data compiled from various press releases Consistent emphasis by the Government on infrastructure development along with the real estate boom spurred this demand of cement in India. Also, in the coming years there could huge migration from villages to cities, which should result in a very healthy growth of cement industry in the short and medium term. KK Kapila of Indian Building Congress told Construction Week India: India is the second largest producer of cement in the world after China. India and China together account for 58% of the worlds cement consumption. It is a fact that the economic slowdown has caused a double digit decline in global cement consumption in the year 2008 and 2009 (15% in 2008 and 17% in 2009). But despite the economic slowdown, in the fiscal year 2008-09 India produced around 181 million metric tonnes of cement representing a growth of about 7.8% over the fiscal year 2007-08. Thankfully the recession seems to losing its clutch on the economy and construction activities are again picking up in the country leading once again to a healthy growth rate of cement industry.

Oversupply? The real estate sector, which consumes around 60% of the total demand, is under pressure since second half of last year and continues to do so. It has affected the overall demand of the cement. A score of projects are lying in initial stages and the construction has been stalled in and around all major cities of the country. Vinod Juneja, managing director, Braj Binani Group spoke to Construction Week India on the situation oversupply in the Indian cement industry. He says: Sustained demand will help absorb the additional supply in the year. The Union Budgets thrust in infrastructure development, encouragement of Public Private Partnership in various small, medium and large projects coupled with the demand for low cost housing in tier II and tier III cities will absorb the supply of cement. On huge capacity additions, Nikhil Mansukhani, Director of Man Infraprojects Ltd says: As we all are aware of the huge investment coming up by the centre towards the infrastructure soon, the prices may see upward trends in long term, in case there is a short supply to fulfil the huge requirements. Moreover, growing momentum in consolidation amongst the cement manufacturers is expected to bring rationality in capacity addition. This would keep the cement prices favourable for the companies. Demand and supply seem to be evenly poised at this stage. However, with a lot of these capacities coming on-stream, the scenario is likely to undergo significant changes. While the industry has definitely gone for production cuts in some cases, capacity utilisation slipped to 92% in fiscal 2008-09 from 98% in the previous fiscal. Prices Price realization in Indian industry, which were on an all time high couple of years back are facing an up-hill task. So far the current peak season has maintained the support to the demand. But it is the most likely scenario that in coming next months there might be a price correction of Rs25-30/bag. Price cut may differ in different regions in the country by a variance of Rs5-8. In last three- five years period, cement prices have mostly been rising, but last few months have seen a reversal of this trend and prices have come down in few regions. With the pipeline capacities coming on-stream, it is expected that price may decrease. Table:- Average Cement Prices Year Average Prices ( Rs. per Bag) 2005-06 153 2006-07 188 2007-08 284 2008-09 240 Commenting on the cement prices, Mansukhani says: Cement is one of the key construction materials as far as the real estate and infrastructure is concern, considering the current revival in the housing demand, there is a possibility of an increase in the demand for the cement in the near future. Any kind of price rise certainly will make impact on the

housing industry by pushing up the prices upward. However, looking at the comfortable supply situation we dont think any abnormal rise in the cement prices. Cement prices always seen ups and down along with the general economic trend in the past. On the issue of cement prices, Manoj Gaur, executive chairman of JP Associates says: I have always been advocating that cement prices are a matter of a regional imbalances and I feel that even though prices might get a bit corrected during this two months up to September but I see fairly stable market from October onwards. But yes, a spurt in cement prices, I dont think will come because the monsoon has been weak but in my opinion especially in northern India, central India, eastern India prices should be stable after October also. Governments role Almost all of the cement manufacturers are of the opinion that Government is doing little to promote the cement industry. One of the top executive from a New Delhi based Cement Company told Construction Week India on condition of anonymity: Government should focus more aggressively on infrastructure development. It must promote concrete roads instead of bitumen roads. The maintenance cost of concrete roads is quite low compared to the bitumen roads, besides improving the road conditions, it will spur the demand of cement. Another common complaint by Indian manufacturers is that Indian companies pay excise duty while imported cement is exempted from Countervailing Duty. The CVD must be reimposed on imports to create a level playing field. Coal supply at linkage price to the industry was reduced to 75%. Coal India has modified the commitment in the fuel supply agreement to 45% at linkage rates. It is important to note that some of cement plants are completely dependent on imported coal. Our take It is difficult to estimate when Greenspans Green Shoots will finally start to appear and the world will come out of the recession and construction sector will gather its earlier pace, but in light of all the factors the medium and long term demand in the country is likely to increase, as the planned infrastructure demand and rapid urbanization in the country will need huge quantity of this all important building material. But with a huge capacity going on stream in the current and next year, it is likely that with these capacity additions, few of the producers will be under pressure on margin front and prices in the short and medium term are likely to remain stable or go down a little.

James Hardie, a world leader in fiber cement technology with operations in the United States, Australia, New Zealand, and Asia, is the only manufacturer that maintains a research and development center devoted solely to fiber cement technology for siding, backerboard, and pipe. That investment has helped make James Hardie the fastest-growing manufacturer of siding for use in new homes and remodeling projects in North America. The

company has been growing at a rate of 15-20% per year - a rate more than three times greater than that of the nearest competitor's entire business in this market segment. The company also recently launched a new colored line of fiber cement siding that will ultimately result in smaller, more frequent orders and a more complex distribution channel. The company managed its approximately 2200 weekly outbound loads manually using a highly customized ERP system, paper reports, and order milestones. Many of the company's nine U.S. plant locations independently managed their own transportation and negotiated rates and capacity. Decisions were often based on personal preferences and cost was often not considered. "When shipment execution is de-centralized, there is no way to truly understand what types of subjective decisions and personal preference choices are being made. There's no good way to measure true cost and carrier performance." - Transportation Manager, James Hardie.

With a combination of specialized, flatbed, and dry van transportation, the company ships interior and exterior building product lines to multiple business channels including distributors, direct to builders, and DIY retail stores. In fact, James Hardie product is shipped direct to every one of the 1800 store locations of America's largest DIY home improvement retailer. Although a good portion of the shipments moved full truckload or intermodal, a high percentage of the retail store deliveries were being shipped through LTL breakbulk facilities, whereby full truckloads would be shipped to the LTL carrier's regional breakbulk facility and would then be de-consolidated for distribution to the individual store locations by the LTL carrier - an effective, yet expensive, option from both a cost and time perspective.