Cement supply chain

Private & Confidential

Indian Cement Industry

Supply Chain Management


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


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


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 %


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


Industry Dynamics

• Non uniform input costs and zonal capacity imbalancesRegional pricing

• Too many regional players, Standard products, Simple technology and limited R&D requirementFragmented market

• Large CAPEX requirementHigh 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 rulesSustainability

• Mining Royalty, SEB charges, Rail freight chargesGovernment control

• Largely correlated with GDP growth by a multiplication factor of1.3-1.4 for developing economy and 1.1-1.2 for developedeconomy

Market Growth


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 India’s limited gypsum deposits areconcentrated 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


Sourcing- Limestone

Volume wise limestone accounts foralmost 60 % of raw material. Sincesetting up plants near quarry saves oninbound transport cost proximity toreserve is the single most importantcriteria.

To the benefit of cement industry highgrade limestone reserves are scattereduniformly all across India.

Mining royalty imposed by stategovernment are paid per ton basis.Dumpers and shovels used in miningconsume high quantity of dieselmaking it the second most importantcost driver


Sourcing- Coal

Government companies mined coal alsoknow as “linkage coal” is 15-20 % cheaperthan open market coal. Companies try tomaximize linkage off take by better liaisonwith railways and coal mining companies

Coal reserves are found mostly in easternstates. 95 % of coal mining is still in controlof center or state government. Steel ,power and cement companies are allowedto do captive or contract mining

Since coal reserves are skewed towards theeastern zone, freight cost is the biggest costdriver. Market coal prices are determinedby global supply and demand equation


Power Plants – Source of flyash

Flyash prices are determined by localdemand and supply equation. Since freightcost is the major component companieslook for nearest source of flyash.

Burning of coal results into flyash. Thermalpower plants across India produce plenty ofgood quality flyash which can be used bycement industry. Flyash is used in producingblended cement grades like PPC

Freight is the biggest component thatdetermines the landed price of flyash


Gypsum

• Indian’s 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


Manufacturing Strategy

• Two types of manufacturing units: Type I is Integrated plants where the entiremanufacturing till cement grinding and packing is done. Second type are grinding unitswhere clinker comes as raw material and only grinding and packing is carried out.

• Blending of raw material: Cement plants receive material from various sourcescomposition of which vary significantly depending on origin. One of the main concernfor cement plants is to achieve consistent raw material chemistry , which is achieved byblending different grade of material. Making a right mix not only improves the yieldbut 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 installcaptive thermal power plant .Low grade is coal is used in these power plants. Flyashproduced in these plants is consumed in-house for blended cement


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


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 plant’s 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


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


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


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 PriceLead DistanceContracting with TransporterWagon/Truck Loading

RegulationsRoad ConditionsTruck TypeRail to road ratio

Demand/Supply for PP granules Bag makers conversion cost Bag specifications Price Risk ManagementMarket Structure Tax levies Alternative Packing Solutions

Local taxes (of Municipalities)Dump Handling costs Location of Dump & manpower

costs Packing Plant ManpowerAdministrative Overheads


Distribution: Numerous Challenges

• Cement has a useful shelf life of approximately 6 months. Customers also have a bias towards fresh cement ( “ Garam Cement “) 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.


Appendix


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


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

Cement supply chain

Business

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