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Indian Cement Industry

Supply Chain Management
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Overview
Manufacturing Process
Product segment
Customer segment
Industry Dynamics
Sourcing
Limestone, Coal, Flyash, Gypsum
Manufacturing
Strategy and challenges
Distribution
Network Strategy, Cost drivers, Challenges
Appendix
RMC Business, Sales Force Organization
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Cement Manufacturing Process
Limestone Quarry
Limestone blending
Limestone is burned with
coal inside rotary kilns
Burned Limestone ( called
clinker) is blended with flyash,
slag or gypsum in grinding mills
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Cement Industry Product Segmentation
Source- www.ultratechconcrete.co
It is made by blending clinker with gypsum. Used in construction where high initial
strength is required
Ordinary Portland Cement(OPC)
In addition to gypsum, PPC contains flyash in the tune of 25-30 %. Addition of flyash
reduces the per ton cost of cement. The long term strength of PPC is higher than OPC
Portland Pozzolana Cement (PPC)
In addition to gypsum PSC contains blast furnace slag. PSC is used where structures are
susceptible to attack of chloride and sulphate ( Marine, Water treatment plants)
Portland Slag Cement (PSC)
BIS allows use of flyash up to 35 % and slag up to 65 %
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Customer Segments
Different nomenclatures are used by different companies but based of needs and
preferences customers can be divided in two broad segments
Individual House Builders (IHB)
These are retail customers. Since they have limited technical knowledge of
construction material, brand value and durability are the top most criteria for
selection
Infra-Commercial -Industrial (ICI)
This segment consists of builders and big construction companies who have
sufficient technical knowledge of product. Quality ,price and service are most
important for these buyers
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Industry Dynamics
Non uniform input costs and zonal capacity imbalances
Regional pricing
Too many regional players, Standard products, Simple technology
and limited R&D requirement
Fragmented market
Large CAPEX requirement
High entry barrier
Ready Mix Concrete, Training and site inspection by qualified
engineers
Value added services
Low demand during monsoon
Cyclic demand
Mining site rehabilitation , Fugitive emission control, Renewable
purchase obligation (RPO) for electricity as per the SEB rules
Sustainability
Mining Royalty, SEB charges, Rail freight charges
Government control
Largely correlated with GDP growth by a multiplication factor of
1.3-1.4 for developing economy and 1.1-1.2 for developed
economy
Market Growth
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Sourcing- Summary
Raw Material Qty/Ton
Cement
Main Source Major Cost Drivers
Procurement
Strategy
Lime Stone 1.3 India has sufficient reserve of good quality
limestone scattered all across the India
Mining royalty, Diesel
price,
Captive mines and
plants near quarry
Coal 0.25 Domestic low quality , high ash coal is used
for making cement which accounts for
majority of consumption, companies also
use imported coal during peak demand
season to hedge supply risk
Linkage coal prices Maximize linkage coal
quantity
Fly ash 0.3 Power plants are the main source of flyash.
They are situated uniformly across India.
Diesel prices Nearest point
sourcing
Gypsum 0.05 Indias limited gypsum deposits are
concentrated around Rajasthan . Companies
import most of the requirement from
Thailand and Middle east
Import duty, freight
charges
Nearest point
sourcing
* All RM consumption fig. are approximate and only main raw
material has been mentioned
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Sourcing- Limestone
Volume wise limestone accounts for
almost 60 % of raw material. Since
setting up plants near quarry saves on
inbound transport cost proximity to
reserve is the single most important
criteria.
To the benefit of cement industry high
grade limestone reserves are scattered
uniformly all across India.
Mining royalty imposed by state
government are paid per ton basis.
Dumpers and shovels used in mining
consume high quantity of diesel
making it the second most important
cost driver
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Sourcing- Coal
Government companies mined coal also
know as linkage coal is 15-20 % cheaper
than open market coal. Companies try to
maximize linkage off take by better liaison
with railways and coal mining companies
Coal reserves are found mostly in eastern
states. 95 % of coal mining is still in control
of center or state government. Steel ,
power and cement companies are allowed
to do captive or contract mining
Since coal reserves are skewed towards the
eastern zone, freight cost is the biggest cost
driver. Market coal prices are determined
by global supply and demand equation
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Power Plants Source of flyash
Flyash prices are determined by local
demand and supply equation. Since freight
cost is the major component companies
look for nearest source of flyash.
Burning of coal results into flyash. Thermal
power plants across India produce plenty of
good quality flyash which can be used by
cement industry. Flyash is used in producing
blended cement grades like PPC
Freight is the biggest component that
determines the landed price of flyash
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Gypsum
Indians gypsum reserves are concentrated in Rajasthan and J&K, out of
which most reserves are either of low purity or deep seated
75 % of gypsum requirement is imported from countries like Thailand,
Oman and Iran
Since freight cost (Sea + Inland) is a major cost component, as a thumb
rule plants near to west coast buy from Oman and Iran while the plant
closer to east coast buy from Thailand
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Manufacturing Strategy
Two types of manufacturing units: Type I is Integrated plants where the entire
manufacturing till cement grinding and packing is done. Second type are grinding units
where clinker comes as raw material and only grinding and packing is carried out.
Blending of raw material: Cement plants receive material from various sources
composition of which vary significantly depending on origin. One of the main concern
for cement plants is to achieve consistent raw material chemistry , which is achieved by
blending different grade of material. Making a right mix not only improves the yield
but also save on corrective material cost.
Captive power generation : Power cost is the major component of manufacturing cost.
Since SEB power is costlier and unreliable, most of the big industry players install
captive thermal power plant .Low grade is coal is used in these power plants. Flyash
produced in these plants is consumed in-house for blended cement
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Manufacturing Strategy
Using Alternate fuel and raw material (AFR) is another new trend in
cement industry. Tyer chips, paint sludge and other industrial waste are
incinerated in the rotary kilns to substitute traditional raw materials and
fuels
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Manufacturing Challenges
High CAPEX requirement approximately 600 Cr/MT
Apart from regular productivity and efficiency related challenges cement
manufacturing faces challenges such as
Environmental : Mining activity causes significant deforestation , noise pollution and
emission. As environmental laws are gradually getting more stringent cement industries
are facing continuous challenge of meeting those norms
Human resources: Most of the cement plants are located in hinterlands and difficult
areas. Additionally cement plants produces many hazardous emission and dust. Due to
all these problems they are not very attractive place for bright employees
Labor unions: Cement plants employs a large number of labor force directly or
indirectly who are well organized under various unions. Successful management of labor
union is big challenge for cement plants
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Distribution Chain for IHB
CMU/GU
Bags are loaded
on wagon or
trucks
Companies use
rail mode for
primary
transportation
C&FA
CFA unloads the
bags, store sand
delivers it when
order is placed
by distributor
Trucks are used
for secondary
transportation
Distributors
Distributors also
store small quaintly
of cement to meet
urgent demand
Apart from selling
distributors help
company in
marketing and sales
promotion
activities
Retailer
Retailers take
order and
deliver to end
consumers
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Distribution Strategy- Hub & Spoke Model
Large Integrated units are few
in number & are situated near to
limestone quarry.
Hub
Smaller GU are located near to
market and flyash/slag source. These
GU source clinker from Integrated
units
Spoke
Integrated units
Grinding units (GU)
Sea Transportation
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Distribution: Key Cost Drivers
Freight charges from plants
to warehouses
Outbound freight to
customers from warehouse
Transportation
(65%)
Packing Bags (PPE) Cost
Bag Branding/ printing
costs
Packing Costs
(15%)
Personnel Costs
Clearing & Forwarding
costs at Dumps
Local Taxes, etc
Others (20%)
Fuel Price
Lead Distance
Contracting with Transporter
Wagon/Truck Loading
Regulations
Road Conditions
Truck Type
Rail to road ratio
Demand/Supply for PP granules
Bag makers conversion cost
Bag specifications
Price Risk Management
Market Structure
Tax levies
Alternative Packing Solutions
Local taxes (of Municipalities)
Dump Handling costs
Location of Dump & manpower
costs
Packing Plant Manpower
Administrative Overheads
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Distribution: Numerous Challenges
Cement has a useful shelf life of approximately 6 months. Customers also have a
bias towards fresh cement ( GaramCement ) forcing manufacturers to predict
accurate amount of inventory
In India construction activities slows down during rainy season that is why cement
demand is cyclic in nature. A fine balance needs to be achieved between inventory
cost and capacity utilization.
Since railway route is the cheapest mode of transport, availability of railway wagon
is a big constraint in present scenario.
Since companies put multiple plants to save on transportation cost, which market
should be served from which plant is big challenge
Value added services such as Ready Mix Concrete ( RMX) has now become a
industry trend. It is putting pressure on lead-time and vehicle TAT.
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Appendix
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Ready Mix Concrete
RMC: Ready to be consumed
customized mix of cement,
sand and crushed stone
Consistent concrete mix for large construction projects
Compared to traditional methods no space is required for storing and preparation of ingredients such as
sand
Saving on labor and supervision cost
Less wastage of concrete
Faster and smoother construction
Benefits for customer
Orders are received only few hours in advance , putting extra pressure on planning and coordination
Vehicle route planning is a serious challenge
Accurate sourcing of sand and crushed stone requires additional planning
Challenges for companies JIT model
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Sales force organization structure
Central sales
officer
Regional Sales
officer 1
District Sales
Officer 2
District Sales
Officer 1
Area Officer 1
Area Officer 2
Regional Sales
Officer 2
Role Responsibility
Central Sales Officer PAN India
Regional Sales Officer Few States
District Sales Officer Few districts
Area Sales Officer Zones within district