Cement Logistic Challenges

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With the Cement industry showing a downward trend in profit margins, better logistics management proves beneficial to many of the cement manufacturers. Let us explores the various modes of logistics that can provide a cost-effective means of cement transportation. Cement, being a bulk commodity, transporting is a costly affair. The selling and distribution costs account for around 21% of production cost. In 2009-10, top 30 cement companies spent more than Rs 10,000 crore to carry cement to the consumer. The domestic cement industry has been making continuous efforts to cut its logistic costs. [pic]

At the time when the industry was entering into the downside of the cycle, with profit margins coming down to 20-25 per cent from 35-40 per cent, better logistics management proved beneficial to many of the cement manufacturers. Using more railway routes than roads, shrinking lead distance (distance between the manufacturing facility and market) and opting for sea-routes wherever possible were some of the ways the industry explored. Currently, for every 50-kg bag of cement, the logistic cost comes to around Rs 18-25 by road and Rs 12-15 by the railway, depending on the distance. The country’s third-largest cement maker, Ambuja Cements, opted for sea-routes to transport its cement from Gujarat to southern market. Today, 70% of the cement movement worldwide is by sea compared to just 1-2% in India. However, the scenario is changing with most of the big players like L&T, ACC and Grasim having set up their bulk terminals. About 3% of the gross revenue is spent on inward logistics while outward logistics accounts for another bulk of 15%. Inward logistics include, coal and limestone transportation, while outward logistics is mostly the final product cement. Some companies also incur outbound logistics cost on transporting clinker to their grinding plants. Plants that are closer to the collieries, the inbound transportation costs are less. For plants located far away from the collieries they have the option to import coal. While the freight cost could be optimized on the imported coal through usage of company’s own ships for part of the quantity, the international prices of imported coal and its volatility together with the strengthening of the dollar against rupee could derail this. This could impact the delivery prices of imported coal and also the cost of production. In case of final product, the costs of handling and secondary movement are very high. Although transportation by sea is the cheapest option, unless there is right connectivity from the port to the consuming centre the gains are minimum. Companies, which have plants located closer to the markets as well as to the source of raw materials have an advantage over their peers, as this leads to lower freight costs. Also, plants located in coastal belts find it much cheaper to transport cement by the sea route in order to cater to the coastal markets such as Mumbai and the states of Gujarat and Tamilnadu. Checking logistics costs is an ongoing process for the cement companies. Many are trying to reduce the costs by around 5 -7 % by optimizing the distance of transport. Statistics suggest that about 45 % of the cement produced in the country is being transported by the railway. Cement makers prefer roads for shorter distances. Looking ahead

With demand for cement expected to remain strong with a growth of over 10 %, the logistic activities are in for a boom. In the 2011-12 fiscal, additional cement capacity of 27 million tones is likely to go on stream. With the bulk of the capacities coming up in the South, the demand supply imbalance would continue to be a cause of concern in the South, though it is expected to improve or remain in a status quo position in other regions. The Indian cement industry is the second largest in the world after China, with a total capacity of close to 300 million tones and...
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