Cement sector consolidation is good for shareholders. But what about consumers?

Between April 2023 and July 2024, cement capacity worth 116 million tonnes, almost one-fifth of India’s total production capability, changed hands. But consolidation is far from over. Large companies such as UltraTech Cement and the Adani Group have set aggressive medium term capacity targets.

UltraTech, which just acquired India Cements, wants to increase its capacity by 33% over the next three financial years to 200 million tonnes. The Adani Group wants to almost double its cement capacity to 140 million tonnes. It is not only planning to merge ACC and Ambuja Cements, but also been hunting for acquisitions. On Monday, the Economic Times reported that it is in talks to acquire Heidelberg Cement’s India operations.

Also Read: Ambuja and ACC: Are wedding bells ringing?

Experts estimate another 60 million tonnes of cement capacity to change hands over the next few years. At the end of it all, India will just a handful of cement makers dominating the market. The top four companies — UltraTech, Adani group, Shree Cement and Dalmia Cement Bharat — will control over two-thirds of total capacity. The second tier, where companies such as Ramco Cements, JSW Cements, JK Lakshmi, and JK Cement among others have individual capacity of close to 20 million tonnes, will have a 30% share. The balance will be held by smaller companies who will eventually sell out or close.

Economies of scale

Sure, consolidation has its benefits. It results in better economies of scale and brings in other efficiencies which will help cement makers improve their margins and profits. For instance, after Adani’s takeover, both ACC and Ambuja Cements have claimed a sharp increase in operating margins from around ₹350 per tonne to ₹1,350. 

Stronger and larger companies will be able to add capacity that is needed to meet India’s growing demand for infrastructure. To become a developed nation, India will need to consume a lot of cement. Its per capita cement consumption at 260 kg pales into insignificance when compared to the global average of 540 kg, as per the Economic Survey 2023-24. A fragmented cement market with numerous small companies may not be able to satisfy demand. Take the case of India Cements. Before it was acquired by UltraTech, its cash flow problems were such that it could not operate its factories at an optimal capacity, leave alone adding capacity. 

If capacity additions do not keep pace with the growing demand, prices will rise, hurting consumers and eventually India’s growth story.

Also read | Gautam Adani’s Ambuja Cements draws up $9-billion war plan for Ultratech battle

Stronger companies will also be able to embrace sustainable manufacturing as India moves towards its net zero emission targets.

The flip side of consolidation is that companies will gain pricing power. It will be easy for them to collude, smother market forces and profiteer. Ideally, they should be sharing the benefits of the efficiency that the consolidation has brought with the consumers. But that need not necessarily happen. In the Indian telecom sector, for example, prices have started inching up with just large companies dominating the market now.

The nation will not be able to enjoy the full benefit of consolidation unless regulations that nip market manipulation in the bud keep pace with it. They have to be identified immediately and dealt with quickly. Ironically, the cement industry is not new to allegations of market manipulation. In 2016, the Competition Commission of India fined eleven cement companies ₹6,700 crore alleging cartelization. Eight years on, the case is still finding its way through India’s judicial system. In such a scenario, the consolidation will benefit only shareholders. Consumers and the nation will pay a hefty price.