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Event update: Cement - Takeaways from meeting with FLSmidth

We met the management of FLSmidth, one of the largest global suppliers of production facilities, equipment and service solutions to cement and mining industries. The company is spread across 100+ countries, with India business contributing 9% of revenues; in India the company holds 40% market share of installed cement capacity.

Key takeaways from our interaction with the management on cement industry in India:

• Capacity addition moderating: Domestic capacity ordering moderated to 10-12million tonne per year (mtpa) over FY18-20 from 15-20mt per year over FY14-16. Further, demand slowdown has caused delays in finalising orders over last 6-9 months. Since execution timelines vary from 12-36 months, based on planning, size, approvals, funding, etc, capacity additions are likely to be <20mtpa. However, management noted there have been more enquiries and orders for clinker and integrated units over last 2 years compared to 2014-17, when ordering was higher for grinding units. Nearly 60% of the current orderings of 10-12mt are for integrated units, bulk of which is coming up in North (Rajasthan) and East India.

In CY18, cement capacity stood at 475mtpa and the same is estimated by FLSmidth to be at ~500mtpa by Mar 2020. There are ~560 cement plants in India, of which ~38% account for 90% of the production.

• Capex cost largely stable over last 5-7 years: The average cost of a greenfield capacity is US$120-140/tonne, which has largely been stable over last few years, with no escalation in equipment prices due to high competitive intensity. Of this, US$70-80 is for plant & equipment, with ~50% spent towards production-related equipment (pre heater, kiln, crusher, etc) and the remaining towards captive power plants, conveyors, storage equipment, etc. The balance US$60-70/ton is for construction, infrastructure, etc. Some plants, which are set up at lower costs or/and in shorter time frames, entail strong planning, minimal changes to designs, ancillary infrastructure already available, etc. Notably, while the cost of equipment is comparable on a global basis, construction costs vary across countries, depending on labour, material, etc.
• Plant efficiencies improving: Over the years, efficiencies of plants on both, production and lower power consumption and emission norms, have improved. As cement manufactures are required to lower Nitrogen Oxide (NOx) emissions to 600-800 mg/Nm3 from 800-1,000mg/Nm3 earlier (depending on the age of the plant), FLSmidth has developed an upgraded calciner, reducing NOx emission by 60% from current calciners. According to the company, 80% of the world’s most efficient plants are in India, as companies have been focussing on technology upgradations, automations, captive power plants and waste heat recovery system (WHRS; 2015 onwards typically most plants have WHRS), etc.

·      Strong demand potential: Indian plants operate at ~70% utilisation (340-350mtpa production), with very low per capital consumption of ~210kg. This is sharply lower than the per capita consumption of other developing economies (~2,000kg). Accordingly, outlook for the cement industry over the long term remains strong, driven by infrastructure development and urbanisation.