On prodding of @Donald posting my exisiting work on Cement and further on will add inputs on Birla Corp
Cement can be sold to two sets of customers
- Retail Customer – Trade Segment – Has Higher Margins
- Infra Customer – Non Trade Segment – Has Lower Margins
Only those companies which target and grow Trade Segment win games. For that you need brand recall and shelf space availability because as far as the retail customer is concerned – cement is a push market industry – so whoever is able to push its product first to the customer, will be able to successfully sell it.
The reason being – at the end Cement is a commodity. A layman doesn’t differentiate between different brands. The lead sales influencer is the mason and the shopkeeper.
He goes to buy Cement only when he immediately needs it, and will buy whichever is immediately available. So it is important for a manufacturer that he is able to successfully push his product on the shelf of shopkeeper (ship it on time) and incentivise the shopkeeper enough (discount and commission) so that he sells your product…
Further the brand name should ring a bell with consumer so that he accepts easily what is being pushed to him.
- Sales Price is determined based on demand and supply. It’s a dynamic pricing market.
- Cement is a bulky material – hence handling this bulky material takes a lot of effort. It occupies a lot of space and carries a lot of weight. Hence higher the distance a cement bag travels, higher is the freight and handling cost involved and lower is the profit a manufacturer makes.
Finally you are selling something which costs 7-8 Rs a kg and hence there is a limit to which you can transport it
Cement also cannot be exported - so no China Risk
It is important that the manufacturer keeps his production unit as close as close as possible to the end customer, so over time players tend to become dominant in some regions, where they have maximum plants.
Obviously some good players like Ramco are exceptions to the rule. When Ramco found its existing South market with no demand, it started inflitrating Eastern India and yet sell above his marginal cost of production. So instead of bringing down production , it sold at small positive contribution in Eastern India so that his overall cost of production remains low (due to higher qty produced) and yet he doesnt suffer losses. Why Ramco was able to do this is his cost control. Ramco cost structure allowed. The cost per ton for Ramco is so controlled that he was able to travel all the way from South to East and still earn positive (but small) margins
- Cement is basically is made by heating limestone (calcium carbonate) with small quantities of other materials to 1450°C in a kiln. The resultant hard material which is recovered after heating limestone and chemicals is called ‘Clinker’ .
So obviously anyone who has limestone access is a winner.
Clinker looks like small lumps. These lumps are crushed with a small amount of gypsum into a powdery form – which gives the final product – ‘OPC Cement’.
So in essence following components are compulsory for making OPC cement
- Limestone – Natural Reserve, extracted or mined from Mines
- Heat – requires heat of 1450°C , ideally obtained from Coal or its variants.
- Gypsum –a mineral compulsory for providing the binding nature to cement
However with time, people figured out that limestone can be substituted with other materials namely Flyash or Slag, which will still provide the strength but to a lesser extent. The threshold limit of mixing Flyash is maximum 33%
For big infra projects, limestone component of upto 95% is required, but for the daily homebuilding use, the lower component limestone works fine enough.
- Thus, there are various varieties of Cement depending on the composition of materials, namely OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement (PSC).
|Margin profile for manufacturer||Lowest Margin||Higher Margin||Highest Margin|
Now as I mentioned Limestone is very important. And this is the first question that I asked when I was shown Balance Sheet of Shree Digvijay Cement. It had not own mines …
How did I figure that out ?
Well Limestone Mining Rights are awarded by Govt and are for a definite period of time or till you have reserves in the limestone pit (whichever is earlier) . This right is shown as Intangible Asset in Balance Sheet.
Digivijay Cement had not major value against this