2011 CemWeek India Cement Business Sentiment Survey

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CW Group CemWee RESEARCH

GLOBAL CEMENT INDUSTRY. KNOWLEDGE.

JUNE 2011

CemWee CemWee BMWeek

Second Annual (2011)

CemWeek India Cement Business Sentiment Survey


FOREWORD he CW Group is pleased to share the findings of the Second CemWeek India Cement Sector Sentiment Survey carried out in April and May of 2011 in this report. Over 270 organizations participated in the survey organized by the CW Group Research and CemWeek and we thank all participants for their contribution to this initiative. As the CW Group and CemWeek continue to extend our leadership as the global cement sector's go-to resource and research-oriented industry platform, we are excited to further deepen our coverage of the Indian cement sector. The world’s largest non-China cement market, it is a dynamic sector that warrants a high degree of insight to track trends, sentiments, projects, and outlook. As such, it is with purpose we continue our annual survey initiative, while we prepare an even further enhanced coverage model of the Indian cement industry as we ready new offerings.

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Naturally, the survey only provides a window into the sentiment of the industry at a point in time, but we hope you find the findings interesting and a starting point for reflection. The report shares some of the highlights from the survey in which a wide audience of the Indian sector participated. If you are interested in learning more, do not hesitate to contact us at inquiries@cwgrp.com. Last but certainly not least, we wish to particularly thank the sponsors of this study (in alphabetical order): Cachapuz, Chryso, FLSmidth, KHD Wedag, Lindner, Loesche, and Siemens. These companies, each strongly committed to the Indian cement sector, have provided value support in providing better coverage of the Indian cement sector

Robert Madeira Managing Director & Head Of Research inquiries@cwgrp.com

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CONTEXT The India Cement Sector ndia is the world’s largest, non-Chinese cement market and has seen strong growth over the years. Today, India is home to several large cement manufacturers that continue making their way to become part of the global production league tables… and the trajectory is widely expected to continue.

All-India Available Capacity and Demand (mtpy) Available capacity

300

Demand

200 100 0

FY10

FY11

FY12E

In FY11, all-India cement demand is estimated to have increased approximately 5.5 percent compared to the last fiscal year when demand rose over 10 percent. Coming into the new fiscal year, demand has been softer than hoped for, even as capacity additions continue. Naturally, there are material regional differences and sub-markets that are faring both better as well as worse than the all-Indian average might indicate. In FY10 the effective production capacity reached slightly more than 225 million tons, from which it is expected to expand to an estimated 267 million in FY11 and close to 296 million tons in FY12. With dispatches falling short of the available capacity, utilization has come down from about 90 percent in FY10 to below 80 percent in FY11.

All-India average prices (INR per 50 kilo pag) Average prices

300

250

200

FY10

FY11

FY12

Even so, pricing has been relatively firm as companies have largely managed production. Prices have softened but not as much as otherwise could have been expected, though some regions have seen more weakness. However, prices are expected to stabilize and recover into the next fiscal. As India heads into the future, perhaps through a soft patch, it is ever more important to take the pulse of the professionals in the sector to see what the “frontline” thinks and sees as priorities. On the next few pages, CemWeek’s Second Annual (2011) India Cement Sector Survey and the CW Group Research offer a unique window into how the industry perceives some of these key questions.

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INTRODUCTION number of themes in the inaugural 2010 survey have been repeated, in particular, the expectation, at that stage, of overall growth both of volume and profits in 2010 has been mostly realized. As expected, costs have risen, but so far the industry has largely managed to either absorb these or pass them onto purchasers. It is noticeable in this survey that 'cost control' is identified as one of the key challenges facing the industry in 2011. Equally, it is clear there is no current consensus as to whether input costs will continue to rise or whether the recent trends will slacken. In general the spirit of optimism has carried forward into 2011, but also there is some weakening in critical areas; ■■ Those expecting a growth in employment in the sector have dropped from 76 percent to 63 percent; ■■ Those expecting further growth in capital expenditure have decreased from 83 percent to 63 percent; ■■ Overall in 2010, 84 percent of the sample expected the overall outlook to improve and this has now dropped to 53 percent (and only 20 percent expect it to become 'much better'). It may be that these themes reflect the end of the recent period of growth and the results of recent capital investments coming on line. Equally, the majority of the sample remains optimistic about future performance, employment and the ongoing need for capital investment. On the other hand, the latter may reflect enduring concerns about cost pressures and the impact of the wider global economy on India's economy in the near future. A new theme in this survey is a focus on the impact of environmental and climate change concerns on industry expectations. In 2010, a small but significant (15 percent) of the sample indicated they were looking to move away from coal and other traditional fuels towards bio fuels, industrial waste and similar sources. In this survey, 80 percent of the sample believed that future profits would drop as the Indian cement industry adapted its processes to use less fuel and generate lower emissions. In addition, there was a consensus that the Indian industry should aspire to the same standards as were being introduced in the US and the EU.

Demographics The survey respondents hail from all the main Indian and multinational companies currently operating in India spread across all the companies that form the cement industry from direct manufacture to industry traders and analysts.

CHART: Sector Participation

Cement company Industry analyst, consultant Equipment vendor Other Cement trader

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2011 india cement sector survey

53% 18% 12% 10% 7%

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INTRODUCTION

Function and Organization Level The respondents reflect a full range of the functions within the Indian cement industry. Just under 40 percent work in sales and marketing, 27 percent in production and engineering and the balance in roles such as planning, logistics and research. Senior staff is well represented within the survey with more than half (54 percent) at either senior or regional management level.

CHART: Functional Participation

Sales & marketing Production operations & engineering Consulting & research Planning, finance & other admin Other Trade & logistics

39% 27% 14% 8% 7% 5%

CHART: Staff Level Of Participants

Professional staff 46% Senior management (eg, CEO, Head, GM, EVP, or SVP) 32% Management (eg, Regional manager, Director) 22%

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INTRODUCTION

Location The sample represents the geographic spread of the Indian cement industry with almost 70 percent located in the North or West, near important cement markets and production centers.

CHART: Geographic Participation

North West South East Northeast

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33% 35% 21% 9% 2%

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SURVEY

FINDINGS Recent Performance

51 percent believed the industry had performed well or excellent

he great majority of the respondents believe that performance in the last six months has been at least satisfactory. Almost 51 percent of the sample indicated they believed it had performed well or excellent and only 7 percent believed it had done poorly. As discussed in the introduction, this matches the views largely expressed in the 2010 survey that the industry would expand over 2010.

Despite the optimism about recent performance a sizeable number of respondents (30 percent) indicated it was "below my expectations" and 50 percent that this had met their expectations. There is a correlation between overall assessment of the last 6 months (above) and how well that performance reflected their expectations. Thus 36 percent of those who reported overall performance as 'excellent' or 'well' also indicated this was in excess of their original expectations. A further 56 percent of this category indicated that performance had met their expectations.

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SURVEY FINDINGS Expectations For the Future

Optimism is expected to continue over the coming year

In general, the optimism is expected to continue over the coming year. 50 percent of the sample expect an improvement, 40 percent expect it to be much the same and the balance expect a small decline in performance. However, as discussed in the introduction, this does represent a drop in expectations compared to the 2010 survey.

As in the 2010 survey, equipment manufacturing companies were more optimistic than the rest of the sector, perhaps in part as they were reflecting the optimism of the recent and sustained growth in capital expenditure. Overall 83 percent of equipment vendors believed that future performance would be 'much' or 'somewhat' better in the coming year. In turn, 57 percent of analysts held this view (and a further 30 percent expected performance to be 'much the same'). 45 percent of manufacturers and 37 percent of cement traders expected the next 12 months to be 'somewhat' or 'much' better. This response may reflect position in the production chain with cement traders being closer to the consumer market and identifying potential changes in demand while equipment suppliers are responding to existing demand for additional capital from the manufacturers.

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SURVEY FINDINGS In terms of profitability, again almost 56 percent expect this to improve and 13 percent expect it to decrease in the coming year.

East or West are much more likely to expect cost pressure to worsen

One area where there is less consensus was the future trend for input costs. Around 43 percent believed this would change for the better, 33 percent that it would stay the same and 24 percent that input costs would increase.

This variation is not particularly connected to role in the industry. 43 percent of cement traders and manufacturers expect costs to improve compared to 48 percent of equipment manufacturers. There is, however, a regional element in that firms in the East or West are much more likely (30 percent) to expect cost pressure to worsen compared to only 21 percent in the North.

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SURVEY FINDINGS

Respondents expect to see overall employment to increase

This general optimism around the wider industry is also reflected in the perception of their own prospects. Almost 67 percent of the sample expects their own career prospects to improve and most of the rest expecting them to remain "probably the same".

In general the respondents expect to see overall employment to increase slightly in the coming year. 13 percent expect this to increase "a lot more", 50 percent "a bit more" and 36 percent expect employment levels to "remain the same".

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SURVEY FINDINGS

Focus is on improving domestic sales

Looking ahead two important themes dominated the responses. 31 percent of the respondents saw cost control as the most important issue for their company and 37 percent believed the focus would be on improving domestic sales. Only 7 percent believed that improving export opportunities would be their primary concern.

There is a clear expectation of continued major capital investments across the sector. 63 percent of respondents expect their own company's capital budget to increase and 5 percent expect it to decrease in the coming year.

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SURVEY FINDINGS The impact of climate change and related environmental concerns is clear. Over 76 percent of the respondents believed that the industry would have to trade off future profits in order to reduce CO2 emissions over the next few years.

Over three quarters prioritize emissions reductions over profitability

Equally over 65 percent of the sample believed it was either important (50 percent) or a top priority (15 percent) that the Indian Cement Industry met emerging US/EU standards on emissions.

In general, the willingness to trade off profits for a reduction in CO2 emissions is constant across the sector. The only exception lies with cement traders were only 64 percent believe this is necessary compared to 77 percent of manufacturers. In addition, there is no difference in terms of expectations around profit growth or cost changes in the next 12 months and the view in terms of the longer term impact of new environmental standards. Given the differential timescales this is not surprising.

Relations with Equipment suppliers For the first time the survey asked the cement companies about their relationships with and perception of the main equipment vendors operating in the market. Of the major vendors, FLSmidth was the most frequently mentioned (by over 50 percent of the sample) and seen to be either the 'best' or a 'good' supplier by 90 percent of the firms they dealt with. KHD also received high marks from the survey participants. Interested parties may contact the CW Group to find out more about the findings from this question.

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SUMMARY Summary his is the CW Group and CemWeek’s second annual survey of sentiment among the Indian Cement Industry. Overall, the industry remains optimistic about the immediate future and is aware of the potential impact of more rigorous environmental regulations in the coming years. Broadly, these opinions are shared across the geographical and functional spread of the industry. The main differences are an expectations of cost increases for the large part of the industry based in Western India and that equipment manufactures remain the most optimistic about growth prospects in the coming year. On the other hand, compared to the 2010 survey, there is some evidence of a softening of future prospects. Fewer respondents expect to see the recent growth sustained and this, in turn, has an impact on their expectations in terms of profits and future employment trends. Please contact the CW Group at inquiries@cwgrp.com to arrange for a discussion of this survey and its findings in more detail.

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