By IndraStra Business News Desk
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| Cover Image Attribute: Canva.com |
The Indian cement industry stands as a cornerstone of the nation’s economic and infrastructural development, second only to China in global production capacity. With an installed capacity of approximately 690 million tonnes per year (mtpy) as of FY23-24, it accounts for over 8% of global cement production, fueling India’s ambitious urbanization and infrastructure projects. Yet, beneath this impressive growth lies a persistent challenge: overcapacity. This issue, characterized by production capabilities far exceeding demand, threatens the industry’s profitability, price stability, and long-term sustainability. In the pursuit of a $5 trillion economy by 2027, resolving overcapacity in the cement sector is crucial to ensuring economic resilience and aligning with the Modi administration's vision of self-reliance and infrastructure-led growth. This article explores the roots of overcapacity, its implications, and potential strategies to mitigate its risks, drawing on recent industry insights and broader economic trends.
The Overcapacity Conundrum: A Global and Indian Perspective
Overcapacity is not unique to India; it is a global issue plaguing the cement industry. Globally, the sector has a production capacity of around 6.2 billion tonnes, estimated to meet demand for the next 20 years. In India, the problem is particularly pronounced in certain regions, with capacity utilization rates averaging 65-70% nationwide but dropping to as low as 50-55% in southern India due to excessive capacity additions. This disparity reflects a mismatch between ambitious expansion plans and actual market demand, a trend exacerbated by the industry’s capital-intensive nature and regional market dynamics.
The roots of overcapacity in India trace back to the early 2000s, when rapid economic growth and government-led infrastructure initiatives spurred significant capacity additions. Between 2001 and 2014, about 50% of the current capacity was built, driven by optimism about India’s urbanization and industrial boom. Major players like UltraTech Cement, Shree Cement, and ACC-Ambuja added over 15 million tpy in 2022-23 alone, reflecting confidence in future demand. However, demand has not kept pace, particularly in recent years, due to factors like subdued economic activity post-COVID-19, regional demand variations, and seasonal disruptions such as monsoons and elections.
The government’s infrastructure push, with a budget allocation of US$134 billion (3.4% of GDP) for FY24-25, has bolstered cement demand, particularly for projects like the Bharatmala Pariyojana (34,800 km of highways by 2027) and the Pradhan Mantri Awas Yojana (PMAY) for affordable housing. Yet, even these initiatives have not fully absorbed the excess capacity, especially in southern India, where utilization rates remain low. The result is a competitive market where price wars and low margins are common, as evidenced by a 6% price drop in Q4 FY23-24 due to aggressive volume pushes.
Implications of Overcapacity: Economic and Environmental Costs
Overcapacity has far-reaching implications for the Indian cement industry, affecting profitability, pricing, and sustainability efforts. Economically, low capacity utilization increases fixed costs per unit, squeezing margins and reducing returns on capital employed. In FY23-24, the industry’s EBITDA per ton shrank due to rising input costs and subdued demand, a trend that underscores the financial strain of overcapacity. Companies are forced to compete aggressively, often lowering prices to maintain market share, which further erodes profitability. For instance, cement prices in southern India rose modestly from INR 325 to INR 340 per 50 kg bag in Q4 FY24, while northern India saw higher prices (INR 370-385), reflecting regional demand disparities.
Environmentally, overcapacity exacerbates the industry’s carbon footprint. Cement production is energy-intensive, contributing approximately 8% of global CO2 emissions, with India’s sector accounting for a significant share. Low utilization rates mean that energy-intensive plants operate inefficiently, increasing emissions per unit of output. Despite India’s leadership in energy efficiency—thermal energy consumption averages 725 kcal/kg of clinker, among the best globally—overcapacity undermines these gains by keeping older, less efficient plants operational. The push for greener alternatives like Portland Pozzolana Cement (PPC) and Portland Slag Cement (PSC), which are growing at 7-8% annually, is a positive step. Still, overcapacity delays the transition to sustainable practices by maintaining reliance on excess production.
The government’s sustainability goals, including the Perform, Achieve, and Trade (PAT) program, have driven energy efficiency improvements, with Indian cement companies overachieving their targets. However, overcapacity risks undermining these efforts by encouraging inefficient production to meet short-term market demands. Additionally, regulatory hurdles, such as lengthy approval processes for new plants, exacerbate the problem by delaying the retirement of outdated facilities.
The Role of the Modi Administration and the US Tariff War
The Modi administration’s policies have been a double-edged sword for the cement industry. On one hand, initiatives like the National Infrastructure Pipeline (NIP), now encompassing over 9,305 projects, and the Union Budget’s allocation of INR 2.78 lakh crore (US$33.33 billion) for road transport and highways in FY24-25 have spurred demand. These efforts align with the government’s vision of self-reliance under “Aatmanirbhar Bharat,” encouraging domestic production and reducing reliance on imports. On the other hand, the government’s focus on rapid infrastructure development has incentivized capacity expansions, contributing to overcapacity. For example, Dalmia Bharat’s planned expansion to 110-130 mtpa by 2031 reflects industry optimism but risks further oversupply.
The US tariff war, with a 50% tariff on Indian exports effective August 2025, adds another layer of complexity. While cement exports to the US are minimal, the tariffs could indirectly affect the industry by increasing costs for related sectors like steel and construction equipment, which rely on imported components. This could raise overall construction costs, potentially dampening cement demand if project budgets are constrained. However, the government’s push for export diversification through free trade agreements (FTAs) with the UK and EU, and its resistance to opening agricultural markets in US trade talks, may mitigate these impacts by fostering domestic manufacturing and alternative export markets.
Strategies to Mitigate Overcapacity Risks
Addressing overcapacity requires a multifaceted approach that balances demand stimulation, capacity rationalization, and sustainability. Below are key strategies, grounded in industry insights and broader economic trends:
Demand Stimulation through Policy: The government should continue its infrastructure and housing initiatives, but target underserved regions like southern India to balance regional demand. Dedicated freight corridors for cement transport, as proposed by the Ministry of Railways, could reduce logistical costs and improve market access, boosting utilization rates. Additionally, promoting rural housing through PMAY and increasing disposable incomes can drive demand, as rural areas account for 40% of cement consumption.
Capacity Rationalization: Industry players must exercise restraint in capacity additions. The government could introduce incentives for consolidating or mothballing inefficient plants, particularly in southern India, where utilization rates are lowest. Learning from China, where overcapacity led to a 45% global excess, India could adopt policies to limit new capacity approvals in oversaturated regions.
Export Market Expansion: With India’s cement production capacity projected to reach 550 mtpa by 2025, exports offer a potential outlet for excess supply. However, global trade barriers, such as protectionist policies in other countries, limit cement exports to just 5% of global consumption. The government’s FTAs and “Make in India” initiative could facilitate access to markets in Southeast Asia and Africa, where urbanization is driving demand.
Sustainability and Innovation: Investing in green technologies, such as carbon capture and storage (CCS) and waste heat recovery (WHR) systems, can improve efficiency and reduce environmental impact. The industry’s adoption of WHR systems, covering 20-25% of power requirements, is a step forward, but scaling these technologies requires government support through subsidies or tax incentives. Additionally, stricter enforcement of the Cement (Quality Control) Order 2003 can ensure that only high-quality, sustainable products dominate the market, encouraging the retirement of inefficient plants.
Digital Transformation: The adoption of Industry 4.0 technologies, such as predictive analytics and IoT, can optimize production processes and reduce costs, enabling companies to operate efficiently at lower utilization rates. This aligns with global trends, as seen in China, where technology upgrades reduced environmental impacts by 25-53% between 1996 and 2021.
A Path Forward: Balancing Growth and Stability
The Indian cement industry’s overcapacity challenge is a complex interplay of market dynamics, policy incentives, and global trade pressures. While the Modi government’s focus on capital-intensive development and domestic capability building has fueled growth, they have also contributed to excess capacity, particularly in southern India. The US tariff war introduces additional uncertainties, though its direct impact on cement is limited. To navigate these challenges, the industry must adopt a strategic approach that prioritizes demand stimulation, capacity rationalization, export growth, and sustainability.
The government’s role is pivotal, and this remains an undeniable fact. By targeting infrastructure investments in underserved regions, streamlining approvals for sustainable technologies, and fostering export markets, it can help align supply with demand. Industry players, meanwhile, must resist the temptation to overexpand and invest in efficiency and innovation to remain competitive. As India targets a surge in cement demand to 660 million metric tons by 2030, tackling the sector’s chronic overcapacity will be key to sustaining its role as a cornerstone of economic growth. The industry now faces a critical test: balancing bold expansion plans with grounded pragmatism to secure its place in a resilient, self-reliant economy.
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