ZEBUN NAHAR

INVESTMENT ANALYST

znahar@idlc.com

Research Report: Cement Sector of Bangladesh

Date: April 05, 2011

ABSTRACT
Bangladesh cement industry is the 40th largest market in the world. Currently capacity of the industry is about 20 mn tonnes (MT). Top 13 players are alone controlling over 78% of the total industry capacity. However, the balance capacity still remains quite fragmented. Per capita consumption remains poor when compared with the world average; only 65 kg (FY2009) while our neighboring countries, India and Pakistan, have per capita consumption of 135kg and 130kg respectively. This underlines tremendous scope for growth in the Bangladesh cement industry in the long term. Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. For that reason, industry is regional in nature. Its also seasonal in nature, during Monsoon industry suffers from low demand. Four major costs are associated with the production of cement as provided: Cost elements
Power and fuel costs Raw material costs Transportation costs Other expenses

% of cost of sales
10% 75% 5% 10%

The pricing of cement of various players in the industry are very close to one another. The factories which would be using captive power (which is cheaper and more reliable than grid power) and backed by uninterrupted clinker supply at competitive price, are likely to be more cost efficient to emerge as the market leader. Currently, the standard price of one bag of cement produced by the multinational cement companies ranges within BDT 370 to BDT 390 per bag. On the other hand, price of one bag of cement produced by the local companies ranges within the price bracket of BDT 340 to BDT 365. The common technology which is widely used in our industry from the year 2003 is Portland Composite Cement (PCC) which is made following European Standard Methods (ESM). Earlier, Ordinary Portland Cement (OPC) had been used which was made following the American Standard Method (ASM). PCC gives equal strength and durability like OPC. The basic difference between them is in the manufacturing technology. Only 65%-80% of clinker is required to produce PCC while 95% of clinker is required to produce OPC. So, worldwide PCC has become popular which requires less clinker. Currently, Heidelberg, Holcim and Lafarge are the leaders among multinational cement manufacturers and Shah and Meghna are the leading domestic manufacturers. Shah cement is the market leader with close to 14.20% of the market share, followed by Heidelberg with about 9.30% of the market share. During the 2010, many small local manufacturers like Premier, Seven Circle, Crown, Fresh and King cement increased their sales drastically riding on their benefits of economies of scale, backward linkage and aggressive marketing effort. In Bangladesh, cement consumers are categorized as follows: 1. Individual home makers (25%) 2. Real estate developers (35%) 3. Govt. organizations, i.e., LGED, RHW etc. (40%)

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Cement Consumption (kg) Per Capita

84.5 63 65

90 80 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

45 30 20

48

50

52

55

59

61

2010

Source: IDLC Research

Cement consumption has steadiliy been rising. It is expected that cement companies will enjoy a good growth of margin over the next 3 years. Becasuse, in next couple of years when large capacities are expected to come on-stream, pass through of input cost will be easier and clinker (main raw material of cement) price is expected to remain stable at $53-$58. Currently, multinational cement companies are facing intensive competition with local companies. Local manufacturers have been pursuing more innovative and agressive business strategy compared to multinationals. Local manufacturers seek to seize large market by reaching mass people through economies of scale while multinationals cater the needs of specific group of customers by charging high price through superior brand value and quality. In addition, another basic trend in cement industry is smaller companies are shutting down and the bigger companies are becoming bigger. Leading cement manufacturers are now going for expansion. It is expected that if the ongoing expansion plans complete within FY2011, the total production capacity of the industry will rise by 61%. Cement industry expects the consumption to rise by 25% (it will be much higher if Government projects come on stream). Though it seems that the industry will run overcapacity but as mentioned earlier, industry is dependent on only 13 companies production. So it reveals that the cement industry will fall short of supply if the demand increases in line with the big infrastructural projects of Government as expected in future and this symbolizes the huge growth potential of our cement industry. Industry Demand & Production
Year 2005 2006 2007 2008 2009 2010 Consumption (m n M T ) 7 .6 0 8 .4 0 8 .2 0 8 .5 4 1 0 .5 7 1 3 .9 3 Growth rate % 18.50% 10.53% -2 . 3 8 % 4 .1 0 % 23.82% 31.80% Ca p a c i t y ( m n M T) 1 1 .1 7 1 1 .9 1 1 2 .2 0 1 4 .4 4 1 7 .3 5 1 9 .9 5 Growth rate % 5 .2 0 % 6 .6 3 % 2 .4 8 % 18.38% 20.14% 14.96%

Considering the Life cycle of the industry, currently cement industry of Bangladesh is in the growth stage. Sales of cement are increasing due to growing demand for cement in both the local and foreign markets. The industry realized about 30% and 21% growth in 2009 and 2010 respectively

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after suppressed demand from previous years. Industry expected demand growth is 20%-25% for the next three years based on the assumptions below. 1. Government would be able to materialize its important ADP. 2. According to the UN Population Fund (UNFPA) report 2010, 28% people of our country live in urban areas where the population growth is 3.2 per thousand. Urbanization and demand for accommodation are increasing day by day. Thus it is expected that the real sector will grow steadily with the household users increasing cement consumption pattern. 3. Private sector may get interested to invest in real estate for getting tax advantages of their undisclosed funds 4. Good number of large infrastructure construction projects (Padma Bridge, Flyovers, highways) are on the pipeline. 5. There is no Substitute for Cement. Steel can be used in construction but in limited extent due to its high cost.

On the flip side, some caution has to be maintained due to the current demand- supply gap leading to over capacity and falling margins and prices. Also, given the close linkages between them, the effect of a slowdown in real estate growth or hike in interest rates globally or price increase of imported raw materials should also be considered.

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ACRONYMS AND ABBREVIATIONS

ASM = American Standard Method BCMA= Bangladesh Cement Manufacturing Association CNF = Cost & Freight ESM = European Standard Methods OPC = Ordinary Portland Cement PCC = Portland Composite Cement UNFPA = UN Population Fund

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1.0

PREAMBLE

Gradual substitution of traditional building structures or patterns by modern high-rise ones has pushed up the use of cement. A faster growth in demand for cement has been observed only since mid-1980s, especially with implementation of large infrastructure projects, increased pace of urbanization, construction of apartment buildings and multistoried shopping complexes in urban areas and a shift in the taste of rural people for modern houses.

2.0 STATE OF THE INDUSTRY 2.1 Cement Industry Overview

Development of cement industry in Bangladesh dates back to the early-fifties but its growth in real sense started only about a decade.The country has been experiencing an upsurge in cement consumption for the last five years. Government gave permission for establishing cement industries in Bangladesh in FY1995. Initially the cement industry took place without the proper analysis of the demand and supply of cement in the country. Within the span of the two to three years, industry attained expanded capacity of the product with stable growth rate of consumption. There were mainly four dominant players in the cement industry in the year 1998 that produced their own cement to meet the demand of their customers. These companies were: Meghna Cement (owned by Bashundhara group) Eastern Cement (currently known as Seven Horse) Chatok Cement Chittagong Cement (taken over by Heidelberg where the local brand is called Ruby)

After a decade, currently 123 companies are listed as cement manufacturers in the country. Among them 63 have actual production capacity while 32 are in operation. The current installed capacity of the industry is 20.0 mn MT. This installed capacity has been calculated under two conditions below: 1. all factories are in operation 2. production is at its peak season Though the installed capacity is 20.0 mn MT, currently the acutal capacity is about 13.96 mn MT due to supply constraints for power and clinkers.

Market size derivation

Total demand (mn MT) Standard Price per beg (BDT) Total Market size (BDT mn) Total Market size (USD bn) 13.93 350 97,510 1.35
Source: BCMA & IDLC research

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Overview of Cement Industry

Total Production capacity (mn MT) Industry average utilization rate Actual capacity excluding obstacles (mn MT) Local consumption (mn MT) Per capita consumption (FY2010) Total factories registered Factories started operation Currently plants in operation Factories exporting cement to India Size of export in FY2010 (K MT/year) Construction % of GDP Construction sector growth in FY2010 (according to BBS) Industry consumption growth in FY2010 Expected industry growth rate in next 5 years Largest 13 cement companies hold (market share) 20 70% 13.96 13.93 84.5 Kg 123 63 32 8 260 10% 8% 32% 25% / year 78%
Source: BCMA & IDLC research

Industry Demand & Production scenario 20.00

14.44 17.35 11.17 7.60 11.91 8.40 12.20 8.20 8.54

19.95

15.00 10.00 5.00 -

13.93 10.57

2005

2006

2007

2008

2009

2010

Consumption (mn MT)

Capacity (mn MT)

Industry structure
Multinationals , 27%

Local Manufacturers, 73%

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3.0 INDUSTRY CHARACTERISTICS 3.1 Seasonality and Cyclicality of the Industry

Seasonality of cement industry

Peak Season Dull/off Season (depends on monsoon)

January to April/ May and October to December June to September

Bangladesh cement industry is known for its seasonality which can be as high as 50%. Cement demand declines during the monsoons due to a slowdown in construction activities. On the other hand, though the yearly capacity of the industry is saturated with overcapacity, market demand gets matched or cross the effective capacity during the first 5 to 6 months of the year. In addition, the cement industry, like most capital-intensive commodity industries, is cyclical in nature with respect to supply. Given the high gestation period of 24-30 months, there is a time lag between capacity build-up and cement demand. Cement demand is closely linked to the growth of the construction sector. Hence, when the construction sector is strong, demand increases. As a result, the profitability rises, leading to capacity additions by existing players and the entry of new players. However, since it takes 2 -2.5 years to build a cement plant, it is likely that before completion, demand could decrease or stagnate, or the capacity additions could exceed demand. This can lead to a fall in cement prices, and the industry could face a downturn, leading to reducing operating rates or shutting down capacities.

3.2 Cement Industry Regional in Nature

Cement is a high-volume, low-value commodity. Transporting over long distances adds to the cost, resulting in lower margins to the players. This makes cement a regional commodity where lower distribution cost makes it remunerative to producers. Cement consumption varies region wise because the demand-supply balance, per capita income and level of industrial development differ in each region. In our country Dhaka, Chittagong and Mongla account for 91% of total consumption.

Area wise consumption:FY2010

63.50%

1.50% 7.50% 12.00%

15.50%

Dhaka

Mongla

Chittagong

Sylhet

Rajshahi

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Key points Supply At present, the demand-supply situation is tightly balanced with the latter being marginally higher. As the cement industry is dependent on few companiess production, more expansion will be needed to meet the large demand of govt infrastructures. Housing sector acts as the principal growth driver for cement. However, recently industrial and infrastructure sectors have also emerged as demand drivers. High capital costs and long gestation periods. Access to cheap source of clinker supplier also acts as a significant entry barrier. Our cement industry depends on imported raw materials. Currently international price of clinker is stable. But any kind of volatility in its price remained a concern. End users of the product get benefited if they are near to the distribution plant of the company. But when their positioning is at distance from the distribution plant, companies used to charge premium. Moreover, brands used to charge premium on account of better quality perception also. Intense competition among players regarding price due to homogeneous product.

Demand

Barriers to entry

Bargaining power of suppliers

Bargaining power of customers

Competition

4.0 COST AND PRICING STRUCTURE 4.1 Cost Elements

There are a number of cost elements which are taken into consideration for price fixations of cement bags. Four major costs are associated with the production of cement as provided: 1. Power and fuel costs 2. Raw material costs 3. Transportation costs 4. Other expenses Cost elements Power and fuel costs Raw material costs Transportation costs Other expenses % of cost of sales 10% 75% 5% 10%
Source: IDLC Research

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1. Power and fuel costs

Cement industry is power-intensive with power and fuel costs constituting approximately 7%-10% of the cost of sale of cement, and hence has a major impact on the operating expenditure of the manufacturers. 30 KW to 35 KW electricity is needed for producing per MT cement. Though a large portion of the power requirement is met through national grid, increasingly large companies are opting for captive power plants to reduce costs and to have continuous power supply. Currently, 1718 cement manufacturers got captive power plants.

2. Raw material costs

The second major component in the production of cement is raw material costs. Main raw material of production is clinker which accounts 70-75% of the COGS. Bangladesh does not have its own supply of limestone and cannot produce clinkers domestically. Except Lafarge, all other cement manufacturers of Bangladesh import clinkers. But currently, even Lafarge is also dependent on imported clinker due to the unavilability of Limestone. About 10-15 million tonnes of clinker is imported annually from Thailand, Indonesia, Malaysia,China,Philippines and also in small quantity from India by railway. The price of clinker increased to $73 a tonne in 2009 from $55-63 a tonne in 2008. But at the end of 2009, the price began to decline, lowest price was $42 per tonne. At present, standard price of clinker in international market is $52 to $58 per tonne. As clinker makes about 60%-70% by monetary value of the total raw material of cement, the reduction in the price will certainly help the cement producers to get cost advantage. Raw material Key raw material Additives Major Exporters of Clinker

Clinker Gypsum and Fly ash Thailand, Indonesia, Malaysia, China, Philippines and India
Source: IDLC research

Cost derivation of Clinker (on an average) CNF (cost & freight) cost in CTG Vat on landing at CTG Total cost of Clinker (landing at CTG) Vat on landing at Dhaka Total cost of Clinker (landing at Dhaka)

$ 53.00 BDT 350 or $5 /ton $ 58.00 BDT 840 or $12 /ton $ 65.00
Source: IDLC Research

Apart from clinker, other raw materials used by the cement industry are fly ash, ironslag and gypsum.

3. Transportation cost
The weight/ price ratio of cement effects transportation cost significantly. Location of a cement plant and the cost to transport the cement to its distribution terminals, determines the plants competitive position and price it may charge.

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Although in a minimal percentage but rising loading restriction imposed on vehicles crossing over the Jamuna Bridge and priority movement of vehicles carrying food grain are also causing setbacks for the industry by increasing transportation cost.

4. Other expenses
Other expenses include employee costs, administration expenses, others. These account for 5-10% of the cost of sales.

4.2 Pricing Structure

The pricing of cement of various players in the industry are very close to one another. Due to the presence of homogeneous products in the market, price war is a sensitive issue in this industry which exists from time to time in the cement market. Cement prices have been on an upward trajectory since 2007 in line with steady increase in clinker costs. However, the large capacity expansions are expected to weigh down on price realizations by cement companies due to increasing availability of product. Moreover, cement prices, like all commodity prices, are influenced by demand-supply dynamics. Seasonal factors like weak demand during monsoon in most areas also put pressure on prices. As the freight cost accounts for a substantial proportion of sales price, the ruling market price of cement becomes different in different regions. Currently, the standard price of one bag of cement produced by the multinational cement companies ranges within BDT 370 to BDT 390 per bag. On the other hand, price of one bag of cement produced by the local companies ranges within the price bracket of BDT 340 to BDT 365. Additional capacity utilization of the existing units as well as commissioning of new producing units is likely to bring down the sales price, unless there is an equivalent rise in demand. But if the demand does not rise proportionately to absorb the additional supply, the units would have to lower price to induce more sale to maintain the required level of revenue income. The quality of cement, brand image, export potential, price of cement in international market, anti- dumping position of cement manufacturer, future tariff policy etc. will have an impact on price of cement in future. The factories which would be using captive power, which is cheaper and more reliable than grid power and backed by uninterrupted clinker supply at competitive price are likely to be more cost efficient to emerge as the market leader. Hence, average price of cement is expected to increase by BDT 5.0 - BDT 10.0 per bag over the next 3 years. Price may not increase in line with increasing demand as the cost of sales may dip due to stable clinker price and increasing supply of product.

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5.0 PRODUCT AND TECHNOLOGY 5.1 Ordinary Portland Cement (OPC) and Portland Composite Cement (PCC)
Till 2002, only one type of cement was available in Bangladesh was Ordinary Portland Cement (OPC) which is made following the American Standard Method (ASM). From the year 2003, various types of cements became available in Bangladesh which helped the cement industry to provide differentiated and improved products to the customers. The cement which is widely used from the year 2003 is the Portland Composite Cement (PCC) which is made following European Standard Methods (ESM). Holcim (Black Cement) was the first company to launch this type of cement in the market. Currently ratio of production of PPC and OCC is 95:5. PCC gives equal strength and durability like OPC. The basic difference between them is in the manufacturing technology. Only 65%-80% of clinker is required to produce PCC while 95% of clinker is required to produce OPC. So, worldwide PCC has become popular which requires less clinker.

Portland Composite Cement (PCC) Ingredients used in PCC Clinker Slag Fly Ash Limestone Gypsum Ordinary Portland Cement (OPC) Ingredients used in OPC Clinker Gypsum

Ratio 65-80% 21-35% 0-5% Ratio 95-100% 0-5%

Source: www.cemweek.com

5.2 Technology
The manufacture of cement is a two-phase process. Firstly, Clinker is produced. Most common methodology of producing clinker is to mix up calcareous minerals such as chalk, limestone containing silica and alumina and heat upto 1450 degree C. After cooling it, clinker is formed. Secondly, the clinker is ground with calcium sulphates and with industrial processes wastes such as blast furnace slag, limestone and fly ash to produce Portland cement. Two basic types of clinker production processes exist, depending on the way the raw materials are prepared before entering the kiln system: Wet method (use in Bangladesh) Dry method

In the wet method, water is added to form wet thick slurry and dry process is based on drying the bulk materials to form a dry powdered meal. The choice of process depends on moisture content of the available raw material. When wet raw materials (moisture content over 20%) are available, the wet process can be preferred. However, in Europe, todays new cement plants are all based on the dry

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process as the wet process requires approximately 56% to 66% more energy. For dry processes, current state-of-the-art technologies are kiln systems with multistage cyclone preheaters and precalciners. Each step in manufacture of portland cement is checked by frequent chemical and physical tests in plant laboratories. The finished product is also analyzed and tested to ensure that it complies with all specifications.

Standardization-Bangladesh is maintaining
Standardization Main constituents BSTI (Bangladesh Standardization Authority) has been adopted the European Norms and titled as BDS EN 197-1:2003 a) Clinker b) Slag c) Fly ash d) limestone e) Gypsum

Bangladesh has adopted EN197- 1:2000 as Bangladesh Standard, titled BDS EN 197-1:2003. Under this Standard there are 27 products in the family of common cements, which are grouped into five main cement types as follows:

CEM I Portland cement CEM II Portland- composite cement CEM III Blast furnace cement CEM IV Pozzolanic cement CEM V Composite cement

Source: www.cembureau.be

While clinker is the main component in all types of cements, the kind and the amount of the other constituents determine the type of cement. For example, Portland cement consists of 95% clinker, whereas Portland composite cement contains of only 65% clinker. All cement types also contain up to 5% of calcium sulphates. In our country recently, the availability of PCC is 95% against 5% of OPC.

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6.0 PRODUCERS AND CONSUMERS OF THE INDUSTRY 6.1 Major Producers of the Industry
The largest 13 cement manufacturers hold 78% of the market share. Heidelberg, Holcim and Lafarge are the leaders among multinational cement manufacturers and Shah and Meghna are the leading domestic manufacturers. Shah cement is the market leader with close to 14.20% of the market share, closely followed by Heidelberg with about 9.30% of the market share. During the 2010, many small local manufacturers like Premier, Seven Circle, Crown, Fresh and King cement increased their sales drastically riding on their benefits of economies of scale, backward linkage and aggressive marketing effort. Market share of major cement companies Market share
Shah cement Heidelberg Cement Meghna Cement (MCML-King) Seven Circle BD Ltd. Lafarge Surma Cement Ltd. Holcim BD Ltd. Unique Cement (Fresh) MI Cement (Crown) Premier Cement Akij Cement Royal Cement Mongla Cement (SKS)-Elephant MTC Cement (Tiger) 14.2% 9.3% 7.4% 6.9% 6.7% 6.4% 6.1% 4.9% 4.0% 3.7% 3.0% 2.9% 2.8%

Total market share of largest 13 companies

78.29%
Source: BCMA

Market share of Multinational cement companies Market share

Heidelberg Lafarge Surma Holcim Cemex Emirates 9.31% 6.67% 6.45% 2.78% 1.64%

Total Market Share

27%
Source: BCMA

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Revenue & market share of companies:FY2010 (appx.) SL. No.

1 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1 2 3 4 5 6 7 8 1 2 3 4 5 1 Mongla Area

Market/ Area

Name Of Cement Company

Lafarge Surma Cement Ltd. Chattak Cement Total Scan Cement Shah cement MI Cement (Crown) Premier Cement Holcim BD Ltd. Seven Circle BD Ltd. Unique Cement (Fresh) Cemex Cement Anwar Cement MTC Cement (Tiger) Eastern Cement (Shat Ghora) Mir Cement Akij Cement Metro Cement Emirates Cement Total Scan Cement (Ruby) Aramit Cement Dimond Cement Mostafa Hakim Royal Cement NGS Cement S. Alam Confidence Total Meghna Cement (MCML-King) Mongla Cement (SKS)Elephant Dubai Bangla Cement (5 Ring) Nowapara Cement Olympic Cement (Anchor) Total Aman Cement Total

Yearly Total Consumption (MT)

917,685.74 112,538.30 1,030,224.04 785,538.00 1,948,189.00 673,055.80 547,020.00 887,636.00 953,254.62 844,563.44 382,125.00 192,900.00 385,310.95 138,335.00 141,350.00 502,583.65 136,435.00 225,887.00 8,744,183.46 496,109.00 103,630.00 209,800.00 53,950.00 417,790.00 87,530.00 54,160.00 230,290.00 1,653,259.00 1,021,917.30 397,280.00 246,730.00 158,738.60 311,540.00 2,136,205.90 203,625.00 203,625.00 13,767,497.40

Average consumption/year (MT)

76,473.81 9,378.19 85,852.00 65,461.50 162,349.08 56,087.98 45,585.00 73,969.67 79,437.89 70,380.29 31,843.75 16,075.00 32,109.25 11,527.92 11,779.17 41,881.97 11,369.58 18,823.92 728,681.96 41,342.42 8,635.83 17,483.33 4,495.83 34,815.83 7,294.17 4,513.33 19,190.83 137,771.58 85,159.78 33,106.67 20,560.83 13,228.22 25,961.67 178,017.16 16,968.75 16,968.75 1,376,749.74

Market Share
6.7% 0.8% 7.5% 5.7% 14.2% 4.9% 4.0% 6.4% 6.9% 6.1% 2.8% 1.4% 2.8% 1.0% 1.0% 3.7% 1.0% 1.6% 63.5% 3.6% 0.8% 1.5% 0.4% 3.0% 0.6% 0.4% 1.7% 12.0% 7.4% 2.9% 1.8% 1.2% 2.3% 15.5% 1.5% 1.5% 100%

Sylhet Area

Dhaka Area

Chittagong Area

Rajshahi Area Total

Source: IDLC Research

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Current and Upcoming Capacity of Running Cement Industries in Bangladesh Present capacity (mn MT/year)
2.25 1.44 1.26 1.20 1.20 1.20 1.02 0.90 0.90 0.18 0.84 0.80 0.72 0.72 0.60 0.60 0.36 0.51 0.50 0.40 0.35 0.25 0.21 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.18 0.10 1.65 1.26 0.81 0.60 0.47 2.49 End 2011

Sl.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Running industry
Shah Cement Meghna Cement Mills Ltd. Akij Cement Ltd. Heidelberg (Scan) Lafage Cement Premier Cement Seven Circle cement Ltd. Heidelberg (Rubi) Holcim Cement (BD) ltd. (Dhaka) Holcim Cement (BD) ltd. (Mongla) M.I Cement Factory (300 days) Unique Cement Ryal Cement Mongla Cement Factory Emirates Diamond Cement Factory M.T.C Cement Ltd. Aramit Cement Ltd. Confidence Cement Ltd. S.Alam Cement Mills Ltd. Cemex (BD) Ltd. Olympic Cement Anwar cement Ltd. N.G.Saha Cement Mills Ltd. Chatak Cement Ltd. Aman Cement Factory Ltd. Mir Cement Metropoliatan Cement Ltd. Eastern Cement Ltd. Dubai (BD) Cement Mills Ltd. Alhaj Mustafa Hakim Cement Noapara Cement Mills Ltd.

Probable capacity expansion (mn MT/year)

1.86 4.80 0.60 1.54 0.75 1.98

Total capacity after expansion (mn MT/year)

4.11 6.24

Probable completion year

Jan-11 Jun-11

1.80 2.56 1.65 2.88

Sep-10 Jun-11 End of 2011 Not finalized

1.62 1.32 1.10

End 2011 Not finalized 2011

0.65

Dec-11

Total

20

16

36
Source: IDLC Research

Industry Outlook in FY2012 2,010

Total installed capacity (mn MT) Actual capacity (mn MT) Total Demand (mn MT) 19.95 13.96 13.93

2012
32.06 22.44 17.41

in mn MT Growth rate
61% 61% 25%

Supply-Demand Ratio

100%

129%
Source: IDLC Research

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6.2 Major Consumers of the Industry

In Bangladesh, the main cement consumers are: 1. Individual home makers 2. Real estate developers 3. Govt. organizations, i.e., LGED, RHW etc.

Major User Group of Cement

Individuals Real estate developers Government projects 25% 35% 40%
Source: IDLC Research

Real estate developers and Govt. projects are the dominant users of cement. During 2007-2008 public sector construction works were slowed down under caretaker government. Unwillingness to disclose the source of income contributed to the downward trend in real estate sector, i.e., building of apartments, flats etc. during that time period.

Cement Consumption and GDP Growth rate MT (in mn) Year

2005 2006 2007 2008 2009 2010 7.60 8.40 8.20 8.54 10.57 13.93

GR %
11% -2% 4% 24% 32%

GDP Growth rate

5.96% 6.63% 6.43% 6.19% 5.74% 5.80%

Cement consumption Growth in last 5 years

83%
Source: IDLC Research

Cement Consumption (kg) Per Capita

84.5 63 65

90 80 70 60 50 40 30 20 10 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

45 30 20

48

50

52

55

59

61

2010

Source: IDLC Research

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7.0 VALUE CHAIN

Supply chain of the industry primarily comprises raw material suppliers, cement manufacturers, distributors and end-users. The primary distributors in the supply chain are wholesalers (large traders with a margin of BDT 5-7 per bag) and retailers (small traders with a margin of BDT 10-20 per bag). Wholesalers-cum-retailers operate in rural areas.

8.0 EXPORT OF CEMENT: SIZE OF EXPORT IS 260 K MT/YEAR

Cement industry started export from FY2007. Currently, companies exporting cement to northeastern states of India are as below: Shah Cement Holcim Bangladesh Limited Seven Circle Unique Cement MI Cement Confidence Cement Premier Cement Aramit

All these companies are exporting in very low quantity to the neighboring countries (India and Myanmar) which are easily accessible through water transportation such as ships and mother vessels. Transportation cost is major concern to export cement. Thus exporting this product to countries which are reachable through connecting water bodies is much more feasible in terms of cost and accessibility. High duty charge is one of the main stumbling-block of cement export. Cement manufacturers in our country produce cement by importing clinker from China and Indonesia (mainly) at a high rate of shipping cost and duties which make the present cost structure impracticable to tap the export potentials for cement. If the government make the duty structure more industry-friendly by exempting some duties on exportable cement and granting cash incentives, cement exporting to Sri Lanka,Nepal,Bhutan and the Middle Eastern (ME) countries will be feasible in future.

9.0 DUTY STRUCTURE OF THE INDUSTRY

Favourable Government policy in the form of tariff protection and low price of clinker in the international market have lead to mushroom growth of clinker crushing units in the country. Government has imposed a supplementary duty of 7% on import of clinker and 25% on import of cement which is in favour of local manufacturers for the further growth of the industry. Current duty structure of raw materials
Clinker Slag Fly ash Gypsium Limestone BDT 350/ton 12% on invoice value 25% on invoice value 12% on invoice value 12% on invoice value
Source: BCMA

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10.0 STEADY GROWTH MARGINS

In next couple of years when large capacities are expected to come on-stream, pass through of input cost will be easier. Moreover, clinker (main raw material of cement) price is expected to remain stable at $53-$58. Therefore, its been expected that cement companies will enjoy a good growth of margin over the next 3 years.

11.0 CURRENT SCENARIO OF THE INDUSTRY 11.1 Dominance by Local Companies

Currently, multinational cement companies are facing intensive competition with local companies. Lafarge, Cemex, Holcim and Heidelberg are among the top ten cement companies in the world, but together they make up only around 27% of the Bangladesh market. Scancement of Heidelberg Group is the biggest among the foreign companies, but its market share is around 9.3% despite it has been in Bangladesh for nearly a decade. Holcim's market share is around 6.4% despite it bought three plants in quick succession more than half a decade back as it planned to emerge as the top player in the country. Lafarge and Cemex, the world's first and the second largest cement companies, have been struggling to survive in the industry. Local companies are grabbing the top slot of the industry by operating in economy of scale and with deft marketing strategy. For example, Shah cement , a subsidiary of the country's biggest conglomerate Abul Khaer Group is now in the top of the industry beating Heidelberg and Holcim by deploying a fleet of trucks in the main growth areas and building the best marketing network in the country. Local companies are investing in backward linkages (captive power plants), have built big plants to reduce cost of production and have a fleet of trucks to carry the products right to the doorsteps of consumers. Quality-wise also, the local companies have made rapid strides. Multinationals bear high overhead costs regarding salary, infrastructure, quality control etc. On the other hand, local companies are more focused to keep the overhead costs low. Multinationals are only concentrating in providing high quality products. But local comapanies are concetrating in offering quality product with additional benefits like home delivery system, rebate, gifts etc. Local manufacturers have been pursuing more innovative and agressive business strategy compared to multinationals. Local manufacturers seek to seize large market by reaching mass people through economies of scale while multinationals cater the needs of specific group of customers by charging high price through superior brand value and quality.

11.2 Industry Survivors: Large Companies

During last five years almost 32 cement companies have been shut down due to inadequcy of raw materials. Its too difficult to the small manufacturers to survive in the industry due to the shortage of raw materials since small companies face difficulties to arange the raw materials in competitive price. Currently, the basic trend in cement industry is smaller companies are shutting down and the bigger companies are becoming bigger. Only 10-15 companies are holding 80% of market share.

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12.0 FUTURE OUTLOOK OF CEMENT INDUSTRY OF BANGLADESH

Considering the Life cycle of the industry, currently cement industry of Bangladesh is in the growth stage. Sales of cement are increasing due to an enormous demand for cement in both the local and foreign markets. The industry realized about 30% and 21% growth in 2009 and 2010 respectively after suppressed demand from previous years.

Industry expected demand growth is 20%-25% for the next three years based on the assumptions below. 1. Government would be able to materialize its important ADP of building big infrastructure projects. 2. According to the UN Population Fund (UNFPA) report 2010, 28% people of our country live in urban areas where the population growth is 3.2 per thousand. Urbanization and demand for accommodation is increasing day by day. Thus it is expected that the real sector will grow steadily with the household users increasing cement consumption pattern.
Population Growth rate of Bangladesh Total Number of population Year (mn) 2000 140.77 2001 143.29 2002 145.80 2003 148.28 2004 150.73 2005 153.12 2006 155.46 2007 157.75 2008 160.00 2009 162.22 2010 (est.) 164.40 2050 176.53 (forecasted)

Population Growth Rate 1.8% 1.8% 1.8% 1.7% 1.6% 1.6% 1.5% 1.5% 1.4% 1.4% 1.3% 7.4%

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3. Private sector may get interested to invest in real estate for getting tax advantages of their undeclared funds 4. Good number of large infrastructure construction projects (Padma Bridge, Flyovers, highways) are on the pipeline. 5. There is no Substitute for Cement. Steel can be used in construction but in limited extent due to its high cost. On the flip side, some caution has to be maintained due to the current demand- supply gap leading to over capacity and falling margins and prices. Also, given the close linkages between them, the effect of a slowdown in real estate growth or hike in interest rates globally or price increase of imported raw materials should also be considered.

13.0 CEMENT INDUSTRY: GLOBAL SCENARIO

13.1 Major Players

World production of cement is 2.6 billion tons/year (FY2010). The world production of cement is dominated by China (1,400 mn MT), followed by India (260 mn MT), United States, Japan and Russia. Other countries featuring prominently on the global cement space include Spain, South Korea, Italy, Iran, Turkey, and Brazil. Significant capacity expansions in China, India, Saudi Arabia, UAE, Turkey, Egypt, and Brazil are underway and planned for the next few years. China and India, together account for more than 50% of the total cement produced and consumed in the world. Developed markets including the US, Western Europe and Japan are mature and currently facing declining demand due to the global economic crisis.

Cement Statistics by U.S.Geological Survey

world production( m)
3500 3000 2500 2000 1500 1000 500 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

The largest global players are Lafarge (France), Holcim (Switzerland) and Cemex (USA). In terms of cement production, Bangladesh ranks about 40th in the world. According to Global Industry Analysts, Inc., global demand for cement is forecasted to rise 4.1% per year and reach to 3.5 billion metric tons in 2013. Gains will be fueled by rising investments in

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infrastructure among the developing countries of the world, driven by economic growth and increasing per capita income levels.

Top Five Global Producers (mn MT/year)

China India Japan USA Russia 1,400 260 84 68 53

per capita consumption (kg) : FY2009

Korea China India Pakistan Bangladesh 1,200 1,000 135 130 65

Asian group Middle east World average

400 600 270

Global Cement Consumption

mn MT FY 2007 FY 2008 FY 2009 2,568 2,763 2,857 CAGR % 9.9 7.6 3.4

13.2 Strong Future Growth of Developing Asian countries

A number of developing countries in the Asia/Pacific region is attaining strong gains in cement consumption. China, which accounts for nearly half of world cement demand, is facing a slowing rate of growth as construction spending is decelerating. Other fast-growing markets for cement in the region like Philippines, Thailand and Vietnam, all are enjoying stable growth rates of exceeding 6% per year. In the developing nations of Latin America, Eastern Europe and the Africa/Mideast region, however, advances in cement demand has slowed down considerably from the robust gains seen during the 2003-2008 period. Increases in cement demand in the developed areas of the US, Western Europe and Japan is lagging the average global pace of growth. Basically, by nature, global demand of cement is rotating according to the growth of the construction sector in each region. High demand for cement had been observed in Europe and America during FY1960-70. After FY1970, cement demand shifted to India, Malaysia, Hongkong, Singapore and Korea. High Demand for cement continued in these areas till FY1990. From FY2000, developing countries of Asian regions like Bangladesh, Pakistan, Nepal and Burma are now enjoying high growth rate of cement consumption. This trend is expected to continue till FY2035.

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14.0

CONCLUDING REMARK
The cement industry is likely to maintain its current growth momentum and continue growing at around 20% to 25% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main growth drivers. Our cement consumption per year was only 65kg in FY2009 whereas, in India its 135 kg and in Pakistan its 130kg. So there is a lot of opportunity to grow in this industry. If the import duty structure of various cement products, e.g. finished cement, semi-finished cement and basic raw materials for cement (25%, 12% and 7% respectively) continues i.e. import duties is on favor of the local manufacturers and the construction sector remains booming with smooth power supply than nothing to be surprised that cement industry will be the most evolving industry in the next three to five years. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60%-65% of the country's cement. If housing sector growth wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch.

Industry Opportunities & Threats Opportunities

Strong economy Construction sector growth Govt. support on local manufacturing rather than importing Growing urbanization

Threats
Construction sector dwindling Energy price and supply International pricing of raw materials Growing usage of steel materials for construction

Disclaimer: This Document has been prepared and issued by IDLC on the basis of the public information available in the market, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts & information stated in the Document are accurate as on the date mentioned herein. Neither IDLC nor any of its director, shareholder, member of the management or employee represents or warrants expressly or impliedly that the information or data of the sources used in the Document are genuine, accurate, complete, authentic and correct. Moreover none of the director, shareholder, member of the management or employee in any way be responsible about the genuineness, accuracy, completeness, authenticity and correctness of the contents of the sources that are publicly available to prepare the Document. It does not solicit any action based on the materials contained herein and should not be construed as an offer or solicitation to buy sell or subscribe to any security. If any person takes any action relying on this Document, shall be responsible solely by himself/herself/themselves for the consequences thereof and any claim or demand for such consequences shall be rejected by IDLC or by any court of law.

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