THREAT OF NEW ENTRY:

High Capital Requirement:

Fixed costs in the cement industry are particularly high and significant relative to the
variable costs. Fixed costs generally account for more than 40% of the overall production
costs. They are, for the most part, sunk costs because cement plants, once built, can
serve no other purpose. As the profit margins are low, the break-even point is long.

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One significant cost of production is the freight charges (15-20%) incurred during
transport due to the bulky nature of limestone and cement. To meet the demand of ready
mixed concrete, there should be sufficient number of facilities across the country for it to
be transported to the customer's site within two hours of production increasing
requirement of capital. Also, the demand is cyclic considering the buying pattern of the
Indian market and huge scale is required to sustain demand downside tenure which
again forces the players for huge initial investment. The high capital requirement causes
a high barrier to entry. This results in higher revenues as there are less number of players
in the market thereby increasing profit.
Supply side economies of scale:
The primary raw materials, coal & limestone, are mostly purchased through government
auction of respective mines. The impact of auction of limestone and coal mines would not
affect the overall industry's raw material costs substantially in the short-term. Most of the

big players have limestone mines with leases extended till 2030. The coal blocks were
secured at base price. The full impact of linkage auction is expected only post FY18 when
most of the existing free capital would expire and players might bid very aggressively for
linkage due to high prices. All these factors create moderate threat of new entrants. This
may result in a slight downfall in revenues as there are more players in the market
thereby lowering profit.

Customer Switching Costs:

Dealers, who are the direct buyers of the industry, find it difficult to switch from one
manufacturer to the other because of the high security deposit paid upfront and the
attached legal documentation. Many large players have a well-established dealer
network, creating a relatively lower threat of new entrants. This results in higher
revenues as there are less number of players in the market thereby increasing profit.
Unequal access to distribution channels and Government regulations
A lot of new players have emerged. They established themselves near the thermal powers plants and
steel plants like Reliance and JSW as there is regional access to fly ash and slag.
The Fly Ash Mission commissioned in 1994, propagates increased utilisation of fly ash
with respect to the developments carried out by the R & D Institute of India. On the same
note, Punjab Government has also issued instructions to ensure 100 per cent utilisation
of fly ash stating that all coal, lignite based thermal power stations should achieve 100
per cent fly ash utilisation within five years of notification. As a result, many thermal
power plants like Reliance & Vedanta have entered the cement industry due to the free
availability of fly ash from its plants, even though the big cement players have established
distribution channels and dealerships.
These factors increase the threat of new entry. This results in a decrease in revenues and
thereby lower the profit.
Expected Retaliation: Cartelisation & Price collusion:
With new entrants on the rise and stiff competition in the market, the incumbent players
may retaliate by colluding and executing price wars forming cartels or by buying off the
smaller players in the market. which is evident from the recent past. This results in higher
revenues as there are less number of players in the market thereby increasing profit.
Cement being an undifferentiated product, differential access to raw materials and an
increasing demand forecast for the next two decades have attracted many new players
to enter the cement industry. But, high capital costs and long gestation period make the
threats of new entrant as moderate.